Saving means setting aside income for future needs, while borrowing means receiving money now that must be repaid with interest. In the exam, you need to state reasons for both, match finance options to specific purposes, and evaluate comparative costs and risks.
Why Save and Where to Save
Reasons to save
- To prepare for emergencies such as medical bills or urgent repairs.
- To pay for a specific future goal, like a holiday or car deposit.
- To earn interest on surplus money.
- To avoid having to borrow and take on debt.
Where to save
- Commercial banks offer deposit accounts you can withdraw from at any time, and fixed-term accounts that pay higher interest if the money is left untouched.
- Credit unions are owned by their members, who must share a common bond such as living or working in the same area. Members save together and may receive a dividend on their savings.
- An Post provides State Savings products that are state-guaranteed and tax-free.
- Deposit Interest Retention Tax (DIRT) is deducted automatically from savings interest earned in banks and credit unions.
- Inflation poses a risk because rising prices reduce the purchasing power of your savings over time.
| Feature | Current account | Deposit account |
|---|---|---|
| Purpose | Day-to-day spending and bills | Saving money |
| Interest | Little or none | Earns interest |
| Overdraft | Available | Not available |
| Extras | Debit card, cheque book, regular payments | No cheque book or debit card |
Reasons to Borrow and Matching the Loan to the Purpose
Reasons for borrowing
- To buy an expensive item immediately when savings are not enough, such as a car or home.
- To spread the cost of a large purchase over several years.
- To cover an unexpected emergency bill.
- To pay a once-off charge such as college registration fees.
- For a business, to purchase equipment, vehicles, or premises.
Matching the loan to the purpose
The source of finance must match the lifespan of the item:
| Term | Length | Used for | Examples |
|---|---|---|---|
| Short term | Up to 1 year | Day-to-day shortfalls and quick bills | Bank overdraft, credit cards |
| Medium term | 1 to 5 years | Items providing value over a few years | Personal loans, hire purchase |
| Long term | Over 5 years | Major permanent purchases | Mortgage, long-term commercial loans |
- An overdraft allows current account holders to spend past zero, paying interest only on the overdrawn amount.
- Credit cards provide an interest-free window of about 30 days, but unpaid balances face very high interest rates.
- Under hire purchase, you get immediate use of the good, but legal ownership only transfers after paying the final instalment.
Costs and Interest Rates
Borrowing costs extra because lenders charge interest and administrative fees for lending funds.
Cost of credit = total amount repaid − amount borrowed
When a loan gives an annual percentage rate instead of monthly instalments, calculate interest directly:
Interest = amount borrowed × interest rate × number of years
| Term | Meaning |
|---|---|
| APR | Annual Percentage Rate; the standardised yearly rate showing the true full cost of borrowing. |
| Cost of credit | The total extra euro amount paid above the original sum borrowed. |
| Collateral | A valuable asset pledged by a borrower that a lender can seize if repayments fail. |
| Guarantor | A person who legally agrees to repay the debt if the borrower defaults. |
How interest rates affect finance
- Low interest rates make borrowing cheaper, so repayments fall and borrowing increases, but savers receive a smaller return.
- High interest rates make borrowing more expensive while giving savers a larger return.
Managing Risks and Borrowing Responsibly
Before borrowing, check your budget: your income must cover the repayments as well as your other spending.
- Missed repayments push a loan into arrears, which incurs penalty fees and damages your credit rating.
- On a variable-rate loan, interest rates can rise, increasing monthly repayments and making the debt unaffordable.
- Lenders review your repayment track record on the Central Credit Register (CCR) before approving any loan application.
- Defaulting on a secured loan or mortgage risks the repossession of your home or property pledged as collateral.
- A borrower has a short cooling-off period after signing a credit agreement, during which the agreement can be cancelled.
- The Money Advice and Budgeting Service (MABS) provides free, confidential debt advice in Ireland.
Key terms
- Interest
- The reward earned for saving money or the added cost paid for borrowing money.
- Annual Percentage Rate (APR)
- The standardised yearly percentage rate showing the true full cost of borrowing.
- Annual Equivalent Rate (AER)
- The yearly interest rate that shows the true return earned on savings.
- Cost of credit
- The total amount repaid to a lender minus the original amount borrowed.
- Deposit Interest Retention Tax (DIRT)
- A government tax deducted automatically from interest earned on personal savings.
- Overdraft
- A banking facility allowing current account holders to withdraw money beyond zero up to an agreed limit.
- Hire purchase
- A system where goods are used immediately while paid for in instalments, with ownership transferring only after the final payment.
- Arrears
- Overdue money resulting from missed loan repayments or unpaid bills.
Check yourself
What formula calculates the total cost of credit?
Total amount repaid minus amount borrowed.
What is the key difference between commercial banks and credit unions?
Credit unions are owned by their members, who must share a common bond, and members receive a dividend.
How do low interest rates affect borrowers and savers?
Borrowing is cheaper and repayments are lower, but savers receive a smaller return on their savings.
What state service provides free, confidential advice to individuals in debt difficulty in Ireland?
The Money Advice and Budgeting Service (MABS).