Lesson 3 – Debt and Borrowing

1

Debt and Borrowing

What exactly is debt? Is it always a bad thing? Let's start by thinking about what debt really means.

💬 Discussion Starter

1. Complete the sentence: "A debt is when..."

2. Zoe borrows money from Josh for a concert ticket. Does it still count as debt if you owe money to friends or family?

3. Is it ok to be in debt, or is it always a problem? Are there some items it's ok to borrow for?

2

UK Debt: The Facts

By the end of this lesson you will understand good and bad debt, repayments, interest, APR, borrowing products, and the dangers of loan sharks.

£1.858tn

Total UK personal debt (2020)

£1.56tn

Outstanding mortgage debt

£30,253

Average debt per adult

114%

Debt as % of average earnings

Young people and debt: Citizens Advice found that 20% of people aged 18–34 were behind on their bills in July 2020, compared to fewer than 8% of those aged 35+.

Pandemic impact: 54% of adults in the lowest income fifth borrowed more in March–June 2020 to cover everyday costs. During the pandemic, the richest 20% became richer while the poorest 20% became poorer.

💬 Discussion

Why do you think the rich got richer and the poor got poorer during the pandemic?

3

Good and Bad Debt

Good debt provides an ongoing benefit or financial return. Bad debt does not provide ongoing benefit or financial return.

🗂️ Sort: Good Debt or Bad Debt?

Click an item, then click the correct bucket.

Go on an exotic holiday

Buy a car to travel to work

Buy a house to live in

Get a wardrobe full of new clothes

Fund higher education

Get festival tickets

Buy new limited edition trainers

Good Debt

Bad Debt

Good or bad — make sure it's manageable. Whether debt is "good" or "bad", the borrower must make sure they can afford to pay it back. This means having a budget and sufficient regular income. If you can afford it, it's manageable debt. If not, it's unmanageable debt.

4

Repayments, Interest and APR

When money is borrowed, three things must be repaid: the principal, the interest, and any charges or fees.

Simple Interest Formula: Interest = P × R × T
Total Repayment: Amount Borrowed + Interest

📐 Worked Example

£1,000 borrowed at 20% interest for 1 year:

Interest = £1,000 × 0.2 × 1 = £200
Total repayment = £1,000 + £200 = £1,200

🧮 Practice: Calculate Repayments

Calculate the total repayment for borrowing £3,000 for 1 year at each rate:

Rate	Interest (P×R×T)	Total Repayment
8%	£	£
25.5% (credit card)	£	£
36.8% (credit card)	£	£
1,499% (payday!)	£	£

Click to reveal answers

8%: £240 interest, £3,240 total

25.5%: £765 interest, £3,765 total

36.8%: £1,104 interest, £4,104 total

1,499%: £44,970 interest, £47,970 total — yes, payday lenders really do charge this much!

5

Loan Repayment Calculator

Explore how different amounts, rates and time periods affect total repayments.

🖩 Interactive Calculator

Amount Borrowed (£):

Interest Rate (%):

Time (years):

Type:

Enter values and click Calculate.

6

Compound Interest on Borrowing

When borrowing over longer periods, banks use compound interest. Interest is charged on the total owed (principal + previous interest).

📊 Worked Example

£1,000 borrowed at 20% compounded for 3 years:

Year 1: £1,000 × 0.20 = £200 → Owed: £1,200

Year 2: £1,200 × 0.20 = £240 → Owed: £1,440

Year 3: £1,440 × 0.20 = £288 → Owed: £1,728

Formula: Total = P × (1 + R)^T
Example: £15,000 at 9% for 7 years = £15,000 × 1.09⁷ = £27,421

🧮 Practice: Compound Interest

Calculate the total repayment for £3,000 at 20% compound interest:

Period	Your Answer (£)
2 years	£
4 years	£
7 years	£
15 years	£

Click to reveal answers

2 years: £3,000 × 1.2² = £4,320

4 years: £3,000 × 1.2⁴ = £6,220.80

7 years: £3,000 × 1.2⁷ = £10,749.54

15 years: £3,000 × 1.2¹⁵ = £46,221.06

7

APR: Annual Percentage Rate

APR stands for Annual Percentage Rate. It shows the true cost of borrowing as a single percentage, including fees and charges.

Interest Rate

Only one portion of the total cost
Doesn't reflect fees or charges
Determines your monthly payment

APR

Total cost of the loan over its length
Includes all associated charges and fees
Makes it easier to compare loans

Islamic Sharia law expressly forbids the charging of interest on loans (known as usury). It is believed that wealth should be generated only through trade and investment. There are specialist financial products available which are Sharia compliant.

8

Manageable and Unmanageable Debt

Personal circumstances can change without warning. A job loss or family crisis can mean there isn't enough income to cover debts.

🌀 The Debt Spiral

When debt becomes unmanageable, it can spiral out of control:

1. You spend more than you earn

2. You borrow to fill the gap

3. You keep borrowing to maintain your lifestyle

4. More of your income goes to repaying debts

5. All your income goes toward repaying debt — you've nothing left!

Consequences of unmanageable debt:

Financial: Difficult to get further credit, legal proceedings
Emotional: Stress, difficulties in relationships
Physical: Illness brought on by stress
Spiritual: Loss of self-esteem and the ability to cope

9

Borrowing Products

Loans can be secured (backed by an asset like your home) or unsecured (higher APR because the lender takes more risk).

🔗 Match Each Product to Its Description

A loan secured against your property, typically repaid over 25–30 years.

A card that lets you borrow up to a set limit; you pay interest if you don't clear the balance monthly.

Allows your bank account to go below zero, up to an agreed limit.

A credit card that can only be used in a specific shop; often has higher interest rates.

A government loan to cover tuition fees and living costs; repaid after earning over a threshold.

You pay for goods in instalments; you don't own the item until the final payment.

A fixed amount borrowed from a bank, repaid in monthly instalments over a set period.

Overdraft

Student Loan

Mortgage

Hire Purchase

Credit Card

Personal Loan

Store Card

🗂️ Sort: Secured or Unsecured?

Mortgage

Credit Card

Store Card

Overdraft

Personal Loan

Payday Lender

Student Loan

Hire Purchase

Secured

Unsecured

10

Payday Lenders & Loan Sharks

Some borrowing products can be extremely dangerous. Understanding the risks is essential.

Payday Lenders provide very short-term loans for small amounts. Interest rates can be extremely high — 1,500% APR is not uncommon. If you can't repay on time, the lender may "roll over" the loan and the debt grows very quickly.

📊 The Real Cost of Payday Loans

How much it costs to borrow £1,000 from various short-term lenders:

Lender	Months	APR (%)	Total Repayment
LoanPig	6	200	£2,000
Sunny	6	197	£1,986
Mr Lender	6	186	£1,929
Satsuma	6	179	£1,896
QuickQuid	3	288	£1,720
CashFloat	4	213	£1,710
118118 Money	12	43	£1,427

Loan Sharks are illegal money lenders who are not regulated by the FCA. They prey on the most vulnerable individuals — those with poor credit history who struggle to access legitimate borrowing. Their practices are illegal and dangerous.

Q

End of Lesson Quiz

Test your knowledge with these 20 questions. Click Submit Quiz when you're done.

Debt and Borrowing

💬 Discussion Starter

UK Debt: The Facts

💬 Discussion

Good and Bad Debt

🗂️ Sort: Good Debt or Bad Debt?

Good Debt

Bad Debt

Repayments, Interest and APR

📐 Worked Example

🧮 Practice: Calculate Repayments

Loan Repayment Calculator

🖩 Interactive Calculator

Year-by-Year Breakdown

Compound Interest on Borrowing

📊 Worked Example

🧮 Practice: Compound Interest

APR: Annual Percentage Rate

Manageable and Unmanageable Debt

🌀 The Debt Spiral

Borrowing Products

🔗 Match Each Product to Its Description

🗂️ Sort: Secured or Unsecured?

Secured

Unsecured

Payday Lenders & Loan Sharks

📊 The Real Cost of Payday Loans

End of Lesson Quiz