At a Glance...

F1.4 Explain the concept of interest rates, and identify types of interest rates and fees associated with different accounts and loans offered by various banks and other financial institutions.

Skill: Analyzing the Different Types of Loans

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Whether students live in an affluent environment or not, whether they live in an urban area or far from the nearest city, the concept of borrowing and lending is more important than ever. With the cost of living continuing to rise, borrowing may become more and more prevalent in society. Borrowing is no longer just for real estate purchases, but can also be used to purchase cars, furniture, and electronics, for example. The Mathematics Curriculum opens the door to the exploration of the concept of borrowing, as well as to the factors that influence lending, such as interest.

In Grade 6, students will be required to complete a detailed analysis of the different types of loans offered by financial institutions and their uses. They will analyze and compare the calculation of interest rates for each type of loan. The student will also make decisions about the best type of loan for given situations.

Note that a loan is not just limited to a mortgage or car loan and or credit cards. Sometimes it is ideal to find other borrowing strategies. For example, a post-secondary education program can be very expensive (for example university tuition, room or
apartment rental).

Students will explore interest rates offered at banking institutions, for different types of bank accounts and loans. It is important to draw parallels between the types of savings/loan and the interest earnings/costs associated with each so that students begin to understand the differences in possibilities for consumers.

There are several factors that influence an individual's or organization's ability to obtain a loan from a financial institution. The loan is influenced by the individual's or organization's credit score. This means that an individual or organization with a better credit score will be offered a better interest rate in addition to a higher credit limit (loan).

The factors that influence the credit score are:

• bill payment history;
• the use of credit;
• the opening date of the different accounts;
• new credit applications;
• the number and variety of creditors.

It may be more difficult for a person with a lower income to receive a loan than a person with a higher income (for the same amount of money). Debt ratio, credit score, monthly income, assets, job stability, and place of residence are six factors considered by financial institutions before granting a loan, line of credit, or credit card. These criteria contribute to economic inequality in society. Also, the more debt a person has and pays off, the more likely they will be offered additional credit. Banks want to get paid back. They don't want to offer money to people who are too risky, so this creates even more economic and financial inequality in our society.

The following is a list of questions that could be asked of students to help them learn more about loans and interest:

• Why is it important for society and financial institutions to create regulations that affect a person's ability to receive loans?
• How can interest rates affect a person's ability to receive and pay for loans?
• Why do some people never pay interest when they use their credit card?
• Why is it recommended that consumers get a credit card early (at a young age)?
• What are the differences between mortgages and lines of credit?

Skill: Comparing Different Types of Accounts

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Bank accounts are not just limited to savings and chequing accounts. There are different options for savings and chequing accounts, as well as investment accounts. In the Junior and Intermediate Divisions, students will learn about the different bank accounts offered by financial institutions, as well as the factors that differentiate them.

Throughout the course of their learning, students should analyze situations in which different types of bank accounts must be compared. Students can consult the websites of various financial institutions in their area and find information about savings accounts, chequing accounts and investment accounts. Students will use the information they have learned to establish criteria for choosing an account based on the purpose, the interest rates offered and the fees associated with its use.

In order to make objective and informed decisions when selecting an account, the student will need to analyze the different types of fees associated with opening and maintaining the account in question. These fees can be summarized in two categories: monthly fees and transaction fees.

The following questions can help students think and learn more about financial institutions and the accounts offered at each.

• As a consumer, what criteria should be considered when deciding whether to open a chequing or savings account?
• How can interest rates encourage the opening of a savings account instead of a chequing account?
• Should everyone have an investment account? Explain your reasoning.
• Why do banks often offer no-fee bank accounts if a minimum balance is maintained in the account? Explain your reasoning by referring to the concept of loans and interest.
• Is it better to have a chequing account with a high monthly fee or a high transaction fee? Explain.

Knowledge: Types of Accounts

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Bank accounts can be summarized into three broad categories.

Knowledge: Types of Fees

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Knowledge: Types of Loans

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