Borrowing money

Most Canadians must borrow money in order to buy their home. This is called a mortgage. If someone commits to a 3% annual interest rate on their mortgage, what does that mean?

Many new car buyers pay a monthly amount towards the price of the car. Some people finance their vehicle or get a line of credit. What does this mean? Why do people need to borrow money for very large purchases?

Complete the Types of Loans Organizer in your notebook or using the following fillable and printable document.

Research the terms "mortgage," "line of credit," and "financing." Complete the organizer, and provide an example of each loan.

Financing

Borrowing can be helpful to pay for big-ticket items that are needed now, but for which you don’t have enough savings to purchase. The cost of these things are usually high, and so the payment of loans is stretched for years to make it affordable. It is common to borrow money to buy a home, to buy a car, to go to school, or to start a business.

Borrowing money isn’t free. The cost of borrowing is the interest that is charged on the loan. Explore some terms and definitions related to borrowing in the following material.

Borrowing money example

A chef borrowed $3,000 from the bank to put towards a used vehicle. The agreement with the bank is that they will pay it back in 36 months. The interest rate is 9% per year, and their monthly payments are $95.40. After the 36 months, they would have paid the bank a total of $3,434.37. The cost of borrowing is calculated as follows:

Cost = $3,434.37 − $3,000
Cost = $434.37

Therefore, the cost of borrowing is $434.37.

Cost of borrowing calculations

If you would like, you can complete the next series of activities using TVO Mathify. You can also use your notebook or the following fillable and printable document.

Question 1 - Purchasing a truck

A) A contractor is buying a truck for work. They have saved $2,000.00 for the down payment. The remaining $4,000.00 will be financed through the dealership for three years at an annual interest rate of 2%. How much interest would they pay by the end of the finance?

B) The other option is getting a line of credit from the bank for the $4,000.00 at an annual interest rate of 7%. The contractor can take as long as they want to pay back the line of credit as long as they make the annual interest payments each month. How much interest would they pay for the money borrowed?

C) Which option do you think the contractor should choose to purchase the truck? Explain your reasoning.

Question 2 - Purchasing a home

A) A couple is purchasing their first home. They got a $300,000.00 mortgage from the bank. For the first five years they can get a rate of 2.5% fixed. Fixed means the rate will not change during the term. How much interest will they pay on the original amount?

B) They have the option of making bi-weekly payments instead of monthly. Paying the mortgage this way puts more money towards the principal borrowed amount. Why is this so?

Press the ‘TVO Mathify' button to access this interactive whiteboard and the ‘Activity’ button for your note-taking document. You will need a TVO Mathify login to access this resource.

TVO Mathify (Opens in new window) Activity (Open PDF in a new window)

Reflecting on borrowing money

Complete the Borrowing Money Reflection Journal in your notebook or using the following fillable and printable document.

Choose two of the three questions below to complete in your audio or written journal.

• How would the interest rate influence your decision to borrow money?
• Do you think that a high interest rate could convince you to save rather than borrow?
• Why do you think interest rates are higher when you borrow money than when you save money?

Press the Activity button to access the Borrowing Money Reflection Journal.

Activity (Open PDF in a new tab)

Reflection

As you read the following descriptions, select the one that best describes your current understanding of the learning in this activity. Press the corresponding button once you have made your choice.

I feel...

I have an excellent understanding of the concepts I have a very good understanding of the concepts I have some understanding but need to review some more my understanding of the concepts needs a lot more work

Now, expand on your ideas by recording your thoughts using a voice recorder, speech-to-text, or writing tool.

When you review your notes on this learning activity later, reflect on whether you would select a different description based on your further review of the material in this learning activity.

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