lending money (overdrafts, loans)

What is Lending?

When a bank gives you money, it’s called a loan. The bank expects you to pay it back with a little extra called interest. Think of it like borrowing a book from a friend: you promise to return it, and maybe give a bookmark as a thank‑you.

An overdraft lets you spend more than you have in your account, up to a set limit. It’s like a safety net.

• ?? Limit: The maximum amount you can overdraw.
• ?? Interest: Charged only on the amount overdrawn.
• ❌ Fees: Some banks charge a fee each time you use the overdraft.

Example: If your account balance is £50 and you spend £70, you’ve overdrawn £20. If the overdraft rate is 5% per annum, the annual interest on £20 is $I = P \cdot r = 20 \times 0.05 = £1$ (simplified for illustration).

Tip: Always check if your bank offers a “free” overdraft or a “paid” overdraft with a lower rate.

Loans are used for larger purchases like a car or a house. They come in different types:

1. Personal loans – no collateral required.
2. Mortgage loans – secured by a property.
3. Student loans – often have lower rates and deferred payments.

Interest can be simple or compound:

Simple: $I = P \cdot r \cdot t$ Compound: $A = P(1 + r)^t$

Where:

• $P$ = principal (initial amount)
• $r$ = annual interest rate (decimal)
• $t$ = time in years
• $A$ = amount owed after $t$ years

Example: Borrow £10,000 at 4% per annum for 5 years, simple interest: $I = 10{,}000 \times 0.04 \times 5 = £2{,}000$ Total repayment: £12,000.

Before lending, banks check:

• 📊 Credit score: A number that shows how reliably you’ve paid back before.
• 🏠 Collateral: Property or assets you can pledge if you can’t repay.
• 💼 Income: Proof you can afford the repayments.

Higher credit scores and stable income usually mean lower interest rates.

1️⃣ Understand the difference between overdrafts and loans. Use the analogy of a safety net vs a big purchase.

2️⃣ Memorise key formulas: $I = P \cdot r \cdot t$ and $A = P(1 + r)^t$.

3️⃣ Practice interpreting amortisation tables. Know how to read each column.

4️⃣ Highlight creditworthiness factors. Be ready to explain why banks charge higher rates to riskier borrowers.

Good luck! 🚀