Chapter 5: Saving and Borrowing for a Household
Learning Outcome 1.5 | Section A and Section B (Q16)
LO 1.5
Saving and Borrowing for a Household (LO 1.5)
Saving
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Reasons to save: future planned expenditure, emergencies, improve credit rating, retirement income, earn interest
Risks of not saving: cannot afford a house deposit, unable to cover emergencies, insufficient income in retirement
Costs of saving: opportunity cost - money saved cannot be spent on other goods and services
Risks of saving: money may not be easily accessible in fixed-term accounts
Where to Save - Financial Institutions
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Commercial Banks (such as AIB, Bank of Ireland, Revolut) - privately owned. Deposits protected by the Deposit Guarantee Scheme up to €100,000
An Post (Post Office) - government-owned. Some accounts are DIRT-free
Credit Union - member-owned, non-profit. Regular saving builds a relationship that helps when applying for a loan
Why save in a financial institution? Earn interest on savings. Build a credit record for future loan applications
Types of Savings Accounts
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Demand Deposit Account - money can be withdrawn at any time. Lower interest rates
Notice Deposit Account - notice required before withdrawal (such as 7 or 30 days). Slightly higher interest
Fixed-Term Deposit Account - money locked for a set period (such as 1 year). Highest interest rate but limited access
Interest and DIRT on Savings
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Interest (savings) - the reward paid by a financial institution for saving. Expressed as AER (Annual Equivalent Rate)
DIRT = Deposit Interest Retention Tax. A tax the government charges on interest earned from savings. Current rate: 33%
Formulas: Interest = Amount Saved x Rate. DIRT = Interest x DIRT Rate. Interest after DIRT = Interest - DIRT. Total Savings = Amount Saved + (Interest - DIRT)
High interest rates encourage saving (higher reward). Low interest rates discourage saving (lower reward)
An Post advantage: Some accounts charge no DIRT, so all interest is kept
Borrowing - Reasons, Costs and Risks
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Reasons to borrow: buy something that cannot be afforded immediately, cover emergencies, spread the cost of large purchases over time
Costs of borrowing: interest and fees increase the total amount repaid. Loan repayments reduce disposable income. Reduced ability to borrow further
Risks of borrowing: missing repayments damages credit rating. Financial stress if income drops. Risk of losing collateral (such as a house with a mortgage)
What lenders check: income and employment, existing loans, credit rating, security (collateral)
Short-term Finance (repaid within 1 year)
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Bank Overdraft - withdraw more than is in your current account, up to an agreed limit. Cost: high interest rates and fees. Risk: reliance on overdraft
Credit Card - buy now, pay later. Cost: high interest if not cleared monthly, annual fees. Risk: impulse buying, damage to credit rating if payments missed
Used for: groceries, electricity bills, petrol, phone bills - everyday expenses
Medium-term Finance (1-5 years)
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Medium-term Loan - repaid in instalments over 1-5 years, with interest charged. Must be repaid with interest
Leasing - renting the use of an item for a period of time. You do not own it at the end
Hire Purchase - buy in instalments. Legal ownership only transfers after the final payment
PCP (Personal Contract Plan) - car finance with deposit and monthly payments. Option to buy at end using GMFV (Guaranteed Minimum Future Value)
Used for: buying a car, household appliances, furniture
Long-term Finance (more than 5 years)
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Long-term Loan - repaid over more than five years in regular instalments. Must be repaid with interest. Risk of losing collateral
Mortgage - a loan used to buy a home or property. Typically repaid over 20-35 years. The house is usually the collateral
Used for: buying a house, building an extension, purchasing an investment property
Calculating the Cost of Borrowing
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Interest (APR): the cost of borrowing expressed as an Annual Percentage Rate
If you know the interest rate: Interest = Principal x Rate. Total Cost = Principal + Interest. Monthly Repayment = Total Cost / Number of repayments
If you know the repayment amount: Total Cost = Repayment x Number of repayments. Interest = Total Cost - Principal
High interest rates make borrowing more expensive (discourages borrowing). Low interest rates make repayments cheaper (encourages borrowing)
🔢 Savings Calculator (DIRT included)
Calculate interest and DIRT on savings
Calculate loan cost (if you know the interest rate)
Calculate total cost and interest (if you know the repayment)
Top Tip: Always include the € sign in money answers. Do not round up - use two decimal places. Both the savings and loan formulas have appeared on every exam paper.
📚 Tap any term to reveal its definition.
Saving
Saving
Setting aside part of your income instead of spending it, so that money is available for future use.
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Credit rating
A record of how well a person has managed borrowing and repayments in the past. A good credit rating makes it easier to get a loan in the future.
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Opportunity cost (of saving)
The goods or services a person gives up because they chose to save that money instead of spending it.
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Financial Institutions
Financial institution
An organisation that offers financial services such as savings accounts, loans and current accounts. Examples include commercial banks, An Post and credit unions.
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Commercial bank
A privately owned bank that offers a range of financial products including current accounts, savings accounts and loans. Examples include AIB, Bank of Ireland and Revolut.
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An Post (Post Office)
A government-owned organisation that also provides banking and savings services. Some An Post savings accounts are exempt from DIRT.
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Credit union
A member-owned, non-profit financial co-operative that offers savings and loan services to its members. Members must share a common bond, such as living in the same area.
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Deposit Guarantee Scheme
A government-backed scheme that protects savings of up to €100,000 per person in a bank if the bank goes out of business.
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Interest and DIRT
Interest (on savings)
The reward paid by a financial institution to a customer for saving money with them. Usually expressed as an Annual Equivalent Rate (AER).
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AER (Annual Equivalent Rate)
The annual interest rate used to show the reward for saving. It allows savers to compare different savings accounts fairly.
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DIRT (Deposit Interest Retention Tax)
A tax charged by the government on the interest earned from savings. The current DIRT rate is 33%.
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Borrowing
Interest (on borrowing)
The cost charged by a financial institution for lending money. It is added to the amount borrowed and must be repaid. Usually expressed as an Annual Percentage Rate (APR).
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APR (Annual Percentage Rate)
The total yearly cost of a loan, including interest and any fees. A lower APR means a cheaper loan.
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Principal
The original amount of money borrowed, not including any interest or fees.
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Collateral (security)
An asset offered to a lender that can be taken if the borrower stops making repayments. For a mortgage, the house is usually the collateral.
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Defaulting on a loan
When a borrower stops making repayments on a loan. Defaulting damages a person's credit rating and may result in the lender taking the collateral.
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Sources of Finance
Short-term finance
Money borrowed that must be repaid within one year. Used for everyday expenses such as bills, groceries and petrol.
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Bank overdraft
A short-term source of finance that allows a current account holder to withdraw more money than they have in their account, up to an agreed limit.
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Credit card
A short-term source of finance that allows consumers to buy goods or services now and pay for them at a later date.
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Medium-term finance
Money borrowed that must be repaid over a period of one to five years. Used for larger purchases such as cars or household appliances.
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Medium-term loan
A loan repaid in regular instalments over one to five years, with interest charged. Must be repaid with interest.
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Leasing
A medium-term source of finance where a person rents the use of an item for a period of time without taking ownership of it at the end.
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Hire purchase
A medium-term source of finance where a person buys an item in instalments. The lender remains the legal owner until the final payment is made.
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PCP (Personal Contract Plan)
A medium-term car finance option where the buyer pays a deposit and monthly repayments, then decides at the end whether to keep the car by making a large final payment (the GMFV) or return it.
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Long-term finance
Money borrowed that is repaid over a period of more than five years. Used for major purchases such as buying a house.
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Mortgage
A long-term loan used to buy a home or property. It is usually repaid over 20 to 35 years. The property is the collateral. Must be repaid with interest.
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Remember: Never write just "loan" as a source of finance. Always be specific - medium-term loan for a car, long-term loan for a house. One-word answers score zero.
🎥 Watch each video, then use the other tabs to test yourself.
Video 1: Why Do People Save and Where?
Reasons for saving, types of financial institutions and types of savings accounts - including DIRT-free options.
Video coming soon
Video 2: Interest and DIRT - How to Calculate
Step-by-step walkthrough of the interest and DIRT calculation, including the An Post (no DIRT) versus commercial bank comparison.
Video coming soon
Video 3: Borrowing - Sources of Finance Explained
Short-term, medium-term and long-term finance with real examples - bank overdraft, hire purchase, mortgage and more.
Video coming soon
Video 4: Calculating the Cost of a Loan - Exam Walkthrough
Working through loan cost calculations using the two methods that appear on the exam paper (interest rate given versus repayment given).
Video coming soon
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✍️ These questions are taken from past Junior Cycle papers. Click Show Answer to check your response.
📄 2025 Paper - Q16(a)(i) Section B - Personal Finance
David and Linda Evans live in Tralee, Co. Kerry with their three children. David is a teacher and Linda is a paramedic. They want to save for their children's future education.
(i) Recommend two different types of Financial Institution where David and Linda could save their money. Give a different reason for each recommendation. 8m
Financial Institution 1: Commercial Bank (such as Bank of Ireland or Revolut)
Reason: Savings earn interest, which means the amount saved increases in value each year.
Financial Institution 2: Credit Union
Reason: Regular saving with a credit union builds a positive record with them, which makes it easier to get a loan from them in the future.
Other acceptable institutions: An Post, Building Society. Other acceptable reasons: Deposits are protected by the Deposit Guarantee Scheme (Commercial Bank). Some accounts are exempt from DIRT (An Post).
Reason: Savings earn interest, which means the amount saved increases in value each year.
Financial Institution 2: Credit Union
Reason: Regular saving with a credit union builds a positive record with them, which makes it easier to get a loan from them in the future.
Other acceptable institutions: An Post, Building Society. Other acceptable reasons: Deposits are protected by the Deposit Guarantee Scheme (Commercial Bank). Some accounts are exempt from DIRT (An Post).
Top Tip: AIB and Bank of Ireland are the same type of financial institution - both are commercial banks. If a question asks for two different types, use one commercial bank plus either An Post or a Credit Union. Different types means different categories, not different names.
📄 2024 Paper - Q18(b)(i)(ii) Section B - Personal Finance
Mary is thinking of purchasing a car to make her commute to college easier. She is considering taking out a loan of €5,000. The credit union shows monthly repayments of €156.45 over 36 months.
(i) If Mary took out the loan in October and chose the monthly repayment option, what would the total repayment be in one year? 3m
€156.45 x 12 = €1,877.40
(ii) Calculate the total amount Mary will repay and the interest she will pay over the full 36 months. 6m
Total repaid: €156.45 x 36 = €5,632.20
Interest paid: €5,632.20 - €5,000 = €632.20
Interest paid: €5,632.20 - €5,000 = €632.20
Top Tip: When the repayment is given, always multiply by the total number of repayments first. Then subtract the original loan to find the interest. Always show your workings and include the € sign.
📄 2024 Paper - Q9 Section A - DIRT
Katie Sexton has savings in a deposit account for her upcoming wedding. She has earned €200 interest on these savings, which is liable for DIRT at a rate of 33%.
(i) DIRT stands for: Deposit I_______ R_______ T_______ 3m
Deposit Interest Retention Tax
(ii) Calculate how much DIRT Katie will pay to the Government on her interest. 3m
€200 x 33% = €66
Top Tip: DIRT is a tax on the interest earned - not on the total savings amount. Always apply the DIRT rate to the interest only, not to the original amount saved.
📄 2023 Paper - Q15 Section A - Loan Calculation
Mary would like to buy a smart TV priced at €1,000. She has seen a bank loan offer on www.ccpc.ie: Personal Loan €1,000, repayments 12 months at €87.24 per month.
Calculate the total cost of the TV and the interest Mary will pay. 6m
Total cost of TV: €87.24 x 12 = €1,046.88
Interest paid: €1,046.88 - €1,000 = €46.88
Interest paid: €1,046.88 - €1,000 = €46.88
Top Tip: When the repayment amount is given, multiply it by the number of repayments to find the total cost. Then subtract the amount borrowed to find the interest. Do not round your answer - use two decimal places and always include the € sign.
📄 2022 Paper - Q18(c)(i)(ii)(iii) Section B - Saving and DIRT
Kevin has a steady income and has decided to start saving. He plans to save €8,000 and has researched two options: An Post (savings rate 3%, no DIRT) and a Commercial Bank (savings rate 4%, DIRT 33%).
(i) List three reasons for saving. 3m
Any three from:
1. For future planned expenditure (such as a family event or buying a car)
2. For emergencies or unplanned events (such as in case a car breaks down)
3. To earn interest on savings
4. To provide income in retirement
5. To improve a credit rating
1. For future planned expenditure (such as a family event or buying a car)
2. For emergencies or unplanned events (such as in case a car breaks down)
3. To earn interest on savings
4. To provide income in retirement
5. To improve a credit rating
(ii) What does DIRT stand for? 4m
Deposit Interest Retention Tax
(iii) Calculate the interest and total savings after one year for each option. 8m
An Post:
Interest: €8,000 x 3% = €240
Total savings: €8,000 + €240 = €8,240
Commercial Bank:
Interest: €8,000 x 4% = €320
DIRT: €320 x 33% = €105.60
Interest after DIRT: €320 - €105.60 = €214.40
Total savings: €8,000 + €214.40 = €8,214.40
Interest: €8,000 x 3% = €240
Total savings: €8,000 + €240 = €8,240
Commercial Bank:
Interest: €8,000 x 4% = €320
DIRT: €320 x 33% = €105.60
Interest after DIRT: €320 - €105.60 = €214.40
Total savings: €8,000 + €214.40 = €8,214.40
Top Tip: Even though the bank has a higher interest rate, DIRT reduces the interest kept. In this case, An Post gives a better outcome. Always complete both options in full - do not stop after finding the interest.
📄 2022 Paper - Q7 Section A - Interest Rates
When interest rates are high, it encourages saving. When interest rates are low, it encourages borrowing.
(i) What is interest? 4m
Saving: Interest is the reward given by a financial institution for saving money with them.
Borrowing: Interest is the financial cost charged by a financial institution for borrowing money.
Interest is usually expressed as a percentage, such as an Annual Percentage Rate (APR).
Borrowing: Interest is the financial cost charged by a financial institution for borrowing money.
Interest is usually expressed as a percentage, such as an Annual Percentage Rate (APR).
(ii) Outline one reason why low interest rates encourage borrowing. 3m
When interest rates are low, the cost of borrowing is lower. Individuals and businesses are more likely to take out a loan because they will pay less interest, meaning their repayments are smaller.
Top Tip: An outline question needs two prongs - identify the change (low interest rates = lower cost) and then explain the effect (repayments are smaller, so more people borrow). A one-line answer will not earn full marks.
📄 2019 Paper - Q3 Section A - Sources of Finance
Suggest a suitable source of finance to make the following consumer purchases. 6m
| Purchase | Source of Finance |
|---|---|
| House | (your answer) |
| Car | (your answer) |
| Groceries | (your answer) |
House: Mortgage / Long-term loan
Car: Hire Purchase / Medium-term loan
Groceries: Credit card / Bank overdraft
Car: Hire Purchase / Medium-term loan
Groceries: Credit card / Bank overdraft
Top Tip: Never write just "loan" in a source of finance answer. Specify the type - medium-term loan for a car, long-term loan or mortgage for a house. Writing "loan" on its own is too vague and will not earn full marks.
