Borrowing – Activities

Borrowing is a big complex topic. The activities for this topic first allow you to explore ideas about borrowing and debt. You can then choose the types of borrowing that are most relevant to you at this time in your life and select the activities that are right for you.

Group discussion: Good and bad debt

For each of the following, explore these ideas in your peer group and decide if borrowing for these represents good or bad debt

  • Buying a house
  • Going on holiday
  • Buying furniture
  • Buying shares
  • Paying for a university degree
  • Buying a new outfit for a job interview.
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Group discussion: Debt problem scenarios

Have a discussion about these life snapshots of some fictional Olaves:

Scenario 1:

Jenny opened a bank account when she got her first part-time job so that her wages could be paid directly into it. When she bought her new mobile phone she arranged for her phone plan payments to be debited directly from her account each month. Jenny loves using her phone but she’s gone over her data limit twice in the past 3 months and so has had higher bills than she expected and her account has been overdrawn twice. The bank has charged her $10 each time her account is overdrawn.

What should Jenny do? What are the consequences of doing nothing?

Scenario 2:

Jane and her friends are renting a house, and since the lease is in Jane’s name, her friends put their money into Jane’s account each week and the rent is directly debited from Jane’s account by the real estate agent. For the past 3 weeks, one of Jane’s housemates hasn’t put her rent contribution in to Jane’s account, and Jane has had to cover the extra amount.

What should Jane do? What are the consequences of doing nothing?

Scenario 3:

Megan has set up her bank accounts so that part of her income goes directly into her day-to-day account and the rest of it goes into her savings account. Megan has worked out the right amount of money to go into her day-to-day account to cover all of her regular expenses, which are directly debited from that account. This system has been working well for Megan but recently her employer changed their accounts system and her pay has not gone into her day-to-day account for the past 2 weeks. The account is almost empty and her phone and water bills are due tomorrow.

What should Megan do? What are the consequences of doing nothing?

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Personal activity: How much could you save on your credit card costs

Credit cards have advantages such as their convenience, usefulness for shopping online and for emergencies. Their disadvantages are the fees and charges – if the amount outstanding is not paid off each month, high interest charges apply.

The average credit card debt in Australia in January 2016 was $4,300.

Use the MoneySmart credit card calculator to work out:

  • How long it would take the to pay off the average Australian credit card debt using the minimum monthly repayments
  • How much money could be save by paying it all off in two years.

Could you save money by increasing the repayments on your credit card debt (if you have any)?

What is the best credit card?

Credit card features include:

  • Annual fees
  • Interest rate charges
  • Interest free period
  • Reward schemes
  • Other fees or bonuses

You can compare the features of credit cards to work out which credit card best meets your needs.

The Canstar website offers a useful comparison tool: Compare credit cards

  • Does your credit card have features that suit your needs?
  • Would it be worthwhile for you to switch to another card?

MoneySmart on credit cards

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Personal/Group activity: Case study - Finding the right car loan

Is that car affordable? 

If you are planning to buy a car, are the repayments affordable? Check out the MoneySmart Personal Loan calculator to help you answer the question.

You could also consider if a car sharing service is a valid alternative for your needs.

You can use your own information or use the example of a fictional Olave Sarah, to test out the calculator.

Can Sarah buy that car?

Sarah would like to borrow $15,000 to buy a second hand car that she saw on the weekend. Sarah knows she can put aside $200 each month to repay a car loan.

Find out how much Sarah’s repayments will be, using the “How much will my repayments be?” section and entering these details into the calculator:

Can Sarah afford to buy the car?Amount borrowed: $15,000
Interest rate: 9%
Repayment frequency: Monthly
Loan period: 5 years
Fees: $10 per month

Which car can Sarah afford?

Find out how much Sarah can afford to borrow, using the “How much can I borrow?” section of the calculator and entering these details:

Affordable repayments: $200
Interest rate: 9%
Loan period: 5 years
Fees: $10 per month
Given the other costs of running a car – insurance, petrol, registration, maintenance and road tolls – what car price range should Sarah be looking at?

What’s the best car loan?

If you are planning to borrow money to buy a car, do some comparison shopping to get the best car loan deal for you. You could also consider if a car sharing service is a valid alternative for your needs.

Shop around for the best car loan. You can get finance from a car dealer, a finance company or a bank. Look at:

  • Establishment fees
  • Interest rates
  • Early repayment options/charges
  • Other fees and charges
  • Statement fees
  • Conditions associated with moving your loan to another lender.

Canstar provides a helpful car loan comparison website: Compare car loans

Can you find a loan that best suits your circumstances?  How does this fit in with your budget?

You can use the MoneySmart budget planner to see how your repayments fit in your budget:

  • What did you discover when you used the Personal Loan Calculator?
  • What are your thoughts on the results?
  • Do you think there only one answer to “what’s the best car loan?”
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Personal/Group activity: Case study - Finding the right home loan

What’s the best home loan?

If you are planning on borrowing money to buy a home, do some comparison shopping to get the best home loan deal for your circumstances.

Shop around for the mortgage that suits your needs best. Look at:

  • Establishment fees
  • Interest rates – fixed or variable
  • Early repayment options/charges
  • Charges for moving your loan to another lender
  • Other fees and charges

Choice compares fixed rate home loans

Canstar home loan comparison

You can use the  MoneySmart budget planner to see how your repayments fit in your budget:

Budget planner

  • Can you find a loan that best suits your circumstances?
  • Are you aware that variable interest rates can go up as well as down?
  • How does this fit in with your budget?

Are the repayments affordable?

If you are planning to buy a property, are the repayments affordable?

Check out the MoneySmart mortgage calculator to answer the question:

You can use your own information or use the example of a fictional Olave Hannah, to test out the calculator.

Can Hannah afford that unit?

Hannah saw a 2 bedroom unit on the weekend for sale for $500,000. She has savings of $100,000 and needs to borrow $400,000.

The bank has offered a mortgage at a variable rate of interest of 7.5% for a term of 25 years.

Hannah knows she can put aside $3000 per month to pay a mortgage.

Find out how much Hannah’s repayments will be, by entering her information in the “How much will my repayments be?” section of the mortgage calculator:

Can Hannah afford to buy the unit?

Amount borrowed: $400,000
Interest rate: 7.5%
Repayment frequency: Monthly
Length of loan: 25   years
Fees: $10 per month

How can Hannah own her home sooner?

Does it make any difference if Hannah pays $3,000 per month or $1,500 per fortnight on her mortgage?

Find out the answer by entering her information in the “How do I repay my loan sooner?” section of the mortgage calculator.

Use the calculator with your own information to work out what home you can afford to buy. Can you alter your home loan payments so that you can own your home sooner?

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Group activity: Case study - Payday loans

Read about the the borrowing choices Christine is considering and discuss:

Christine and her three closest friends have celebrated their birthdays together since childhood. Christine’s friends are really keen for her to join them on a 1 week trip to Hong Kong to celebrate all of their 21st birthdays. Christine would really love to go with them and they’ve found a fantastic deal on the holiday, but she doesn’t have enough money to pay for the trip right now. Christine sees an ad for fast access to money and immediately borrows $500 for 1 month from a payday lender to cover the cost of the trip. She is pretty sure that she will have enough money to repay the loan when her next pay goes into her bank account.

The total cost of the payday loan is $620, to be repaid in 30 days.

Can you find a cheaper source of funding for Christine’s trip? Look up ‘payday loans’ in your computer search engine and compare the cost of borrowing $500 for 30 days. What is the most expensive cost for borrowing $500 and what is the cheapest that you found?

A week after paying for the trip, Christine had some time on her hands and did a bit more investigating about borrowing money. She found that if she had put the amount on her credit card, there would have been no interest charge at all if she had repaid it in the 30 days.

What would have happened if she could not repay the amount within 30 days?

Have a discussion about:

  • What makes payday loans attractive?
  • Are payday loans worth the cost?
  • What are the risks of using payday loans?
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