BAFS Compulsory Part 1(d) Topic Overview BAFS Compulsory ... · Topic C08: Consumer Credit Topic...

Topic C08: Consumer Credit Topic Overview p. 1

BAFS Learning and Teaching Example As at April 2009

Learning Objectives: 1. To understand and differentiate the different types of personal loans; 2. To understand the 4 Cs of credit – i.e. capacity, character, capital and collateral; 3. To compare and analyse different credit products so as to help apply suitably in

personal financial management; and 4. To understand the importance of maintaining a good personal credit record in

personal finance management. Overview of Contents: Lesson 1 Personal Loans Lesson 2 Mortgage Loan and Credit Card Resources:

Topic Overview and Teaching Plan PowerPoint Presentation Student Worksheet with Answer

Suggested Activity:

Case Study Matching Game

Topic Topic

BAFS Compulsory Part 1(d) BAFS Compulsory Part - Basics of Personal Financial Management C08: Personal Financial Management - Consumer Credit

Level S4 Duration 2 lessons (40 minutes per lesson)

Topic Overview



Lesson 1 Theme Personal Loans Duration 40 minutes Expected Learning Outcomes: Upon completion of this lesson, students will be able to: 1. Explain the features of personal instalment loan; 2. Explain the features of revolving credit facility; 3. Explain the features of personal overdraft; and 4. Discuss the 4 Cs of credit. Teaching Sequence and Time Allocation:

Activities Reference Time

AllocationPart I: Introduction

Teacher starts the lesson by a discussion of getting a loan. PPT#2 3 minutes

Part II: Content Teacher introduces three types of personal loans,

namely personal instalment loan, revolving credit facility and personal overdraft, and explains their features.

Activity 1: Case Study Students are required to form groups of four or

five, read the case of Angela’s Study Loan and answer the questions.

Students are invited to present their answers.

PPT #3-9

PPT #10 Student

Worksheet pp.1-2

23 minutes

Teacher asks the class if they know the factors that banks will consider when deciding whether to grant a credit facility or loan to their customers.

Activity 2: To Lend or Not To Lend Students are required to evaluate five scenarios

and make appropriate decision for each scenario. Students are invited to present their answers.

PPT#11

PPT#12 Student

Worksheet pp.3-5

12 minutes



Teacher introduces the 4 Cs, namely Capacity, Character, Capital and Collateral, of credit.

PPT#13

Part III: Conclusion Teacher concludes the lesson by reviewing the key

concepts covered. 2 minutes



Lesson 2

Theme Mortgage Loan and Credit Card Duration 40 minutes Expected Learning Outcomes: Upon completion of this lesson, students will be able to: 1. Explain the features of mortgage loan; 2. Describe the payment flows of a credit card transaction; 3. Explain the definitions of credit card key terms; 4. Discuss the costs and benefits of credit cards; 5. Understand the importance of credit consumer and its relationship with personal

finance; and 6. Point out the ways to solve the insolvency Teaching Sequence and Time Allocation:

Activities Reference Time

AllocationPart I: Introduction

Teacher starts the lesson by reviewing the 4 Cs of credit and introduces mortgage loan as a type of loan with real property as collateral.

PPT#13 2 minutes

Part II: Content

Teacher describes the process of buying a property with mortgage.

Teacher further explains the key features of mortgage loans in Hong Kong.

PPT#14--16 10 minutes

Activity 3: Payment Flows of a Credit Card Transaction

Students are required to sort out the correct sequence of the steps involved in a credit card transaction.

Students are invited to present their answers.

PPT#17-18 Student

Worksheet p.6

8 minutes



Activity 4: Matching Game Students are required to match the definitions with

the credit card key terms. Teacher checks the answer and explains the

definitions with the class.

PPT#19-20 Student

Worksheet p.7

5 minutes

Activity 5: Use Credit Card Wisely Students are required to work out the payment

amounts of a credit card account. Students are invited to present their answers. Teacher concludes the discussion of the costs and

benefits of credit cards, and advises students to use credit cards smartly when they get one.

PPT#21-23 Student

Worksheet pp.8-9

10 minutes

Part III: Conclusion Teacher reminds students the importance of keeping

good personal finance and the consequences of insolvency.

PPT#24-26 5 minutes



Excel Table for Activity 5 Balance Interest Accrued End of

Brought During Month

Month Forward the Month Balance Monthly Payment

1 3,000.00 150.00

2 2,850.00 49.88 2,899.88 144.99

3 2,754.88 48.21 2,803.09 140.15

4 2,662.94 46.60 2,709.54 135.48

5 2,574.06 45.05 2,619.11 130.96

6 2,488.15 43.54 2,531.69 126.58

7 2,405.11 42.09 2,447.20 122.36

8 2,324.84 40.68 2,365.52 118.28

9 2,247.25 39.33 2,286.57 114.33

10 2,172.25 38.01 2,210.26 110.51

11 2,099.75 36.75 2,136.49 106.82

12 2,029.67 35.52 2,065.19 103.26

13 1,961.93 34.33 1,996.26 99.81

14 1,896.45 33.19 1,929.64 96.48

15 1,833.15 32.08 1,865.24 93.26

16 1,771.97 31.01 1,802.98 90.15

17 1,712.83 29.97 1,742.81 87.14

18 1,655.67 28.97 1,684.64 84.23

19 1,600.41 28.01 1,628.42 81.42

20 1,547.00 27.07 1,574.07 78.70

21 1,495.37 26.17 1,521.53 76.08

22 1,445.46 25.30 1,470.75 73.54

23 1,397.22 24.45 1,421.67 71.08

24 1,350.58 23.64 1,374.22 68.71

25 1,305.51 22.85 1,328.35 66.42

26 1,261.94 22.08 1,284.02 64.20

27 1,219.82 21.35 1,241.17 62.06

28 1,179.11 20.63 1,199.74 59.99

29 1,139.75 19.95 1,159.70 57.99

30 1,101.72 19.28 1,121.00 56.05

31 1,064.95 18.64 1,083.58 54.18

32 1,029.40 18.01 1,047.42 52.37

33 995.05 17.41 1,012.46 50.62



Balance Interest Accrued End of



34 961.84 16.83 978.67 50.00

35 928.67 16.25 944.92 50.00

36 894.92 15.66 910.58 50.00

37 860.58 15.06 875.64 50.00

38 825.64 14.45 840.09 50.00

39 790.09 13.83 803.92 50.00

40 753.92 13.19 767.11 50.00

41 717.11 12.55 729.66 50.00

42 679.66 11.89 691.55 50.00

43 641.55 11.23 652.78 50.00

44 602.78 10.55 613.33 50.00

45 563.33 9.86 573.19 50.00

46 523.19 9.16 532.34 50.00

47 482.34 8.44 490.79 50.00

48 440.79 7.71 448.50 50.00

49 398.50 6.97 405.47 50.00

50 355.47 6.22 361.69 50.00

51 311.69 5.45 317.15 50.00

52 267.15 4.68 271.82 50.00

53 221.82 3.88 225.71 50.00

54 175.71 3.07 178.78 50.00

55 128.78 2.25 131.03 50.00

56 81.03 1.42 82.45 50.00

57 32.45 0.57 33.02 33.02

Total Payment 4,211.23




1 3,000.00 150.00

2 2,850.00 49.88 2,899.88 144.99

3 2,754.88 48.21 2,803.09 140.15

4 2,662.94 46.60 2,709.54 135.48

5 2,574.06 45.05 2,619.11 130.96

6 2,488.15 43.54 2,531.69 126.58

7 2,405.11 42.09 2,447.20 122.36

8 2,324.84 40.68 2,365.52 118.28

9 2,247.25 39.33 2,286.57 114.33

10 2,172.25 38.01 2,210.26 110.51

11 2,099.75 36.75 2,136.49 106.82

12 2,029.67 35.52 2,065.19 103.26

13 1,961.93 34.33 1,996.26 99.81

14 1,896.45 33.19 1,929.64 96.48

15 1,833.15 32.08 1,865.24 93.26

16 1,771.97 31.01 1,802.98 90.15

17 1,712.83 29.97 1,742.81 87.14

18 1,655.67 28.97 1,684.64 84.23

19 1,600.41 28.01 1,628.42 81.42

20 1,547.00 27.07 1,574.07 78.70

21 1,495.37 26.17 1,521.53 76.08

22 1,445.46 25.30 1,470.75 73.54

23 1,397.22 24.45 1,421.67 71.08

24 1,350.58 23.64 1,374.22 68.71

25 1,305.51 22.85 1,328.35 66.42

26 1,261.94 22.08 1,284.02 64.20

27 1,219.82 21.35 1,241.17 62.06

28 1,179.11 20.63 1,199.74 59.99

29 1,139.75 19.95 1,159.70 57.99

30 1,101.72 19.28 1,121.00 56.05

31 1,064.95 18.64 1,083.58 54.18

32 1,029.40 18.01 1,047.42 52.37

33 995.05 17.41 1,012.46 50.62

34 961.84 16.83 978.67 50.00

35 928.67 16.25 944.92 50.00

36 894.92 15.66 910.58 50.00

37 860.58 15.06 875.64 50.00

38 825.64 14.45 840.09 50.00

39 790.09 13.83 803.92 50.00

40 753.92 13.19 767.11 50.00

41 717.11 12.55 729.66 50.00

42 679.66 11.89 691.55 50.00

43 641.55 11.23 652.78 50.00

44 602.78 10.55 613.33 50.00

45 563.33 9.86 573.19 50.00

46 523.19 9.16 532.34 50.00

47 482.34 8.44 490.79 50.00

48 440.79 7.71 448.50 50.00

49 398.50 6.97 405.47 50.00

50 355.47 6.22 361.69 50.00

51 311.69 5.45 317.15 50.00

52 267.15 4.68 271.82 50.00

53 221.82 3.88 225.71 50.00

54 175.71 3.07 178.78 50.00

55 128.78 2.25 131.03 50.00

56 81.03 1.42 82.45 50.00

57 32.45 0.57 33.02 33.02

Total Payment 4,211.23

1

1

BAFS Compulsory PartBasics of Personal Financial

Management

Topic C08:Personal Financial Management- Consumer Credit

Technology Education SectionCurriculum Development Institute

Education Bureau, HKSARGApril 2009

Introduction

This session aims to provide students fundamental understanding of the nature of major types of consumer credit, including personal instalment loan, revolving credit facility, personal overdraft, mortgage loan and credit card. Students will also learn the costs and benefits of borrowing and how to use credit wisely.

Duration

Two 40-minute lessons

Contents

Lesson 1 – Personal LoansLesson 2 – Mortgage and Credit Card

2

BAFS Compulsory PartLearning and Teaching Example2Topic C08:

Consumer Credit

Discussion

Having been working for 3 years, your cousin Angela has decided to study for a degree on part-time basis. The first year tuition fee of the programme is $30,000. She does not have any savings and needs to borrow a loan for the tuition fee. Do you have any idea where and what types of loans she can get?

Lesson 1

Start the lesson by asking the class whether they have any ideas whereAngela can get a loan and what types of loans are available.

Suggested answers:• Loan from her family, relatives, friends, etc.;• Personal loans from banks and financial institutions;• Cash advance from credit card(s); and• Non-Means Tested Loan Scheme (NLS) administered by the Student

Financial Assistance Agency of the Government of the Hong Kong SAR for eligible programmes

Wrap up the discussion with the introduction of different types of personalloans offered by banks and financial institutions. Details will be discussedin the following slides.

3


Consumer Credit

Personal Loans Offered by Banks

Personal instalmentloanRevolving credit facilityPersonal overdraft

Explain to the class that there are three common types of personal loans offered by banks and financial institutions.

4


Consumer Credit

What is a personal instalmentloan?

A personal instalment loan is a type of unsecured loan to be repaid in fixed instalments.

Explain what a personal instalment loan is.

A personal instalment loan requires the borrower to pay back the loan by instalments at fixed time intervals, normally monthly, within a specified period from 6 months up to 4 years.

5


Consumer Credit

Indicative Terms of Personal instalment Loan

Loan Amount($)

MonthlyFlat

InterestRate

Monthly instalment Amount (For Loan Amount of $1,000)(Annualised Percentage Rate)

6 months 12 months 24 months 36 months 48 months

5,000-14,999 0.75 175.0418.41%

91.7519.71%

50.1520.11%

36.3419.99%

29.4719.77%

15,000-49,999 0.65 174.0416.07%

90.7417.23%

49.1317.63%

35.3117.58%

28.4317.42%

50,000-199,999 0.55 173.0313.77%

89.7314.78%

48.1115.17%

34.2815.16%

27.3915.17%

200,000-499,999 0.38 171.32

9.93%88.04

10.68%46.38

11.02%32.53

11.07%25.62

11.06%

500,000 or above 0.25 170.02

7.07%86.707.61%

45.057.88%

31.197.95%

24.277.96%

Source: www.hangseng.com (March 2008)

Show the class indicative terms of personal instalment loans. Update theinformation if needed (Information may be obtained from websites ofbanks in Hong Kong).

Teacher should highlight the following points to the class:1. Fixed monthly instalment amount;2. Maturity ranges from 6 months to 48 months;3. Interest rate is quoted in the form of flat rate (See discussion of flat rate

in the session on Time Value of Money for further details). There is another interest rate called Annual Percentage Rate (APR) which reflects the true cost of borrowing; and

4. Interest rates vary with loan amounts, interest rates are lower for larger loan amounts.

6


Consumer Credit

What is a revolving credit facility?

A revolving credit allows a borrower to use as much of the credit available and only pay interest on the amount of loan drawn.No fixed repayment schedule, normally with a minimum monthly repayment, normally 2 to 3% of outstanding loan balance.Credit limit is restored every time when payment is made without re-applying.

Explain what a revolving credit facility is.

Under a revolving credit facility, the borrower is granted a credit limit. He/She may draw funds up to that limit and pays interest only on the amount of loan drawn.

Unlike the personal instalment loan, there is no fixed repayment schedule. Borrowers may be required to repay a certain percentage, normally 2 to 3%, of the outstanding loan balance a month. The borrower may also repay all the outstanding loan any time he/she wants.

After repayment, the credit limit is restored and the borrower can draw new loan again up to the credit limit without re-applying for the credit facility. That’s why it is called “revolving”.

7


Consumer Credit

Revolving credit limit:• Up to HK$600,000; or• Four times monthly salary

(whichever is lower)

Minimum monthlyrepayment: • 3% of outstanding loan

balance; or• $50 (whichever is higher)

No withdrawal or handling fees.Interest rate = 16% p.a.(APR = 17.27%)

Discuss the terms of revolving credit facility with the above example:

• The size of the credit limit normally depends on the income of the borrower with a maximum limit set by the bank offering such facility. The amount varies among banks.

• The minimum repayment amount is 3% of outstanding loan or a minimum of $50, whichever is higher.

• There is no withdrawal or handling fees charged. For other personal loans, there may be such charges.

• The interest rate in this example is 16% per annum. With the information of minimum monthly repayment (which is 3% of outstanding loan balance), we can calculate the annualised percentage rate, i.e. the APR, which reflects the true cost of borrowing is slightly higher at 17.27%.

Remarks: The APR is computed by finding the internal rate of return of cash flowsinvolved in the loan under certain repayment assumptions. Banks arerequired to indicate the APR for this type of product to facilitatecomparison. Please refer to websites of banks in Hong Kong for theupdated rates.

8


Consumer Credit

What is a personal overdraft?

A personal overdraft provides borrowers a credit line where cash may be withdrawn any time using cheques or other methods of transfer.Borrowers may repay the money any time.Interest charged on daily basis at the Best Lending Rate plus a margin. An annual fee is charged.

Explain what a personal overdraft is.

Personal overdraft is similar to revolving credit facility which a borrower, usually a current account holder, is granted an overdraft limit. The current account holder can withdraw funds up to the limit using cheques or other means of transfer.

There is no fixed repayment schedule and the borrower can repay the overdraft amount at any time. And overdraft facility is also on a revolving basis.

Interest is charged on the overdraft amount on a daily basis at the Best Lending Rate (also known as Prime Rate) plus a margin (the size of the margin depends on the creditworthiness of the borrower). Banks normally charge an annual fee for the facility no matter the overdraft is used or not.

9


Consumer Credit

ABC Bank Revolving Overdraft Facility for Mr. Tam

• Overdraft Limit: Up to HK$200,000

• Interest charged: On the outstandingbalance on daily basis

• Interest rate: Prime Rate + 4% p.a.

• No minimum monthly repayment

nor repayment deadline• Annual Fee: 0.5% on facility amount

ABC Bank Revolving Overdraft Facility for Mr. Tam

• Overdraft Limit: Up to HK$200,000

• Interest charged: On the outstandingbalance on daily basis

• Interest rate: Prime Rate + 4% p.a.

• No minimum monthly repayment

nor repayment deadline• Annual Fee: 0.5% on facility amount

Go through the illustrative terms of a personal overdraft facility.

Highlight that the interest rate of personal overdraft may increase or decrease when the prime rate / best lending rate changes. The annual fee may vary among banks.

10


Consumer Credit

Activity 1:Case Study

Form groups of four or five.Read the case of Angela’s Study Loan carefully and answer the question on Student Worksheet p.2.

Activity 1:

Ask students to form groups of four to five, read the case of Angela’s Study Loan on Student Worksheet pp.1-2 carefully and answer the question that follows. Then invite students to present their answers.

Suggested answer:The personal overdraft seems to be the best for Angela. First, the repayment is flexible and no minimum monthly repayment is required. Second, the interest rate is the lowest among the three types of loans. However, it must be noted that prime rate may fluctuate and increase substantially before the overdraft is paid off. Also, another disadvantage of personal overdraft is the 1% annual fee that is charged on the total overdraft limit granted.

11


Consumer Credit

Do you know?

What are the factors that banks will consider when granting credit or loans to customers?

Ask students to think about the above question. Activity 2 can be used to illustrate the answer for this question.

12


Consumer Credit

Activity 2: To Lend or Not to Lend?

Read the five given scenarios carefully and decide whether you are willing to lend money to the people concerned in each case.

Activity 2 :

Ask students to evaluate the five scenarios on Student Worksheet pp.3-5 and decide whether they are willing to lend money to the persons concerned. Invite students to explain their decisions.

Suggested answers: Scenario A – Yes, Carmen has a good history of paying back.Scenario B – Yes, younger sister has the money to pay back.Scenario C – No, one cannot trust the new friend yet.

Or yes, the new friend will have the money (income from hispart time job) to pay back.

Scenario D – No, uncle has a bad history of not paying back.Scenario E – Yes, if the teammate does not pay back, you can take the

Nintendo DS to offset the debt.

Other reasonable answers can also be accepted.

13


Consumer Credit

The 4 Cs of Credit

CapacityCharacterCapitalCollateral

Explain what 4 Cs of credit are with the five scenarios in Activity 2:1. Capacity refers to the ability of a borrower to repay a loan. A person with

a stable job of reasonable amount of salary income and no other debts would be considered to have a strong financial capacity to pay back a loan, as in Scenario C.

2. Character refers to the willingness to repay a loan. The previous history of a borrower in paying back loans is one of the major indicators of his/her character. Lenders are more willing to lend to borrowers who take debts seriously and pay all debts on time and in full, as in Scenario A/D.

3. Capital refers to the financial worth of a borrower. A borrower with substantial assets such as property, stocks and bonds are able to repay loans even his/her income drops, as in Scenario B.

4. Collateral refers to the assets, such as house, motor vehicle, etc., pledged to secure repayment of a loan. The lender may seize the property if the borrower fails to repay the loan, as in Scenario E.

Point out to the class that when they borrow money in the future. It isimportant for them to repay loans on time so as to maintain a good credithistory. A good credit history and high character rating would make iteasier for them to obtain credit.

End of Lesson 1

14


Consumer Credit

Buying a Property with Mortgage

Lesson 2

Start the lesson by reviewing the 4 Cs of credit and inform the class that they are going to learn about the most common type of collateralised loan, i.e. mortgage loan in this lesson. Explain to the class that buying an apartment involves a large sum of money and many people are not able to pay in full, so they will usually apply for a mortgage loan.Teacher can explain the process of buying a property with mortgage using the above chart.

15


Consumer Credit

Mortgage Loan

A loan that is secured by real property.If the borrower fails to repay the loan, the lender may foreclose or seize the property.

Explain to the class that a mortgage loan is a loan secured by real property. A borrower uses the property he/she buys as a pledge and borrows money from a bank or financial institution.When a borrower defaults, i.e. fails to make the monthly repayments, the lender could foreclose or seize the property, sell it and use the proceed to offset the loan.

16


Consumer Credit

Main Features of Mortgage Loan

Loan-to-value ratioTerm to maturityInterest rateRepayment

Discuss the main features of mortgage loans in Hong Kong: 1. Loan-to-value ratio (LVR) – The Hong Kong Monetary Authority has set a 70%

LVR guideline for residential mortgage lending. That is to say, banks and financial institutions could not advance mortgage loans exceeding 70% of the property value. On the other hand, in order to further support the homebuyers for the purchase of a property, the Mortgage Insurance Programme (MIP) operated by the Hong Kong Mortgage Corporation provides insurance coverage to banks for an amount of up to 25% of the property value, enabling banks to advance mortgage loans of up to 95% the property value. (Please see www.hkmc.com.hkfor more information.)

2. Term to maturity – The term to maturity of mortgage loans in Hong Kong ranges from 10 to 30 years.

3. Interest rate – Currently, the typical mortgage loan rate is Best Lending Rate (BLR) minus a certain margin (it used to be BLR plus a margin some time ago). The BLR is different among banks and changes from time to time. The current margin is about 3 percent (update if needed). Banks also offer fixed rate mortgage loans which charge fixed interest rates throughout the terms of maturity. Hong Kong Interbank Offered Rates (HIBOR) is another mortgage loan rate which is the interest rate charged by banks when lending money to other banks.

4. Repayment – Mortgage loans are typically repaid on a monthly basis with fixed repayment amounts throughout the mortgage loan tenor. The monthly fixed repayments represent both interest payments and principal repayments. The borrower is actually paying down the loan gradually. (For the calculation of monthly repayment amounts, please refer to Topic C07: Time Value of Money.)

Remarks:Teacher may ask students surf the website of banks in Hong Kong (e.g. www.hsbc.com.hk; www.bochk.com; etc.) for further information on mortgageloans.

17


Consumer Credit


Brian has just used his CCA credit card issued by Biz Bank to purchase a $3,000 mobile phone from MP Shop. Do you have any idea of the payment flows behind this transaction?

Activity 3 :

Distribute Student Worksheet p.6. Ask students to sort out the correct sequence of steps involved in a credit transaction. Then Invite students to present their answers.See next slide for the answer.

18


Consumer Credit


Brian MPShop

MP Shop’sBank

CCABiz

Bank

1-A

3-D 2-G

4-I

6-F

5-B

9-E 8-C

7-H

Go through the payment flows of Brian’s credit card transaction.

Some hints for teacher:• Highlight that Brian is able to buy his mobile phone now and pay later

through the use of credit card. If he is willing to pay finance charge/interest to Biz Bank, he can pay it even later.

• The most popular credit cards are VISA, MasterCard and American Express.

• In step D, MP Shop’s bank charged a 2% (the percentage varies among banks and credit card associations) commission on providing the credit card service to the MP Shop.

• In step F, Biz bank withheld 1% (the percentage varies among banks and credit card associations) of the purchase amount as an interchange fee when paying CCA the credit card association.

• After all, the cost of the credit card transaction is mainly borne by MP shop which received only $2,940 for $3,000 transaction.

19


Consumer Credit

Activity 4: Matching Game

Link the terms with their correct meanings.

Activity 4 :

With reference to Student Worksheet p. 7, ask students to complete the matching game by linking the terms with their correct meanings.

20


Consumer Credit

Activity 4: Matching Game

AnnualFee A fee charged by card issuers for the use of credit card.

CashAdvance

Getting cash from the credit card instead of using it for purchase.

CreditLimit

The maximum amount of purchase and/or cash advance acredit card holder may be used on the credit card.

FinanceCharge

The amount of interest charged on unsettled credit cardbalance for the billing period.

GracePeriod

The period of time allowed for credit card holders to settlethe account without penalised for a finance charge.

Minimumpayment

The minimum amount of the balance a credit card holder isrequired to pay for the billing period in order to maintain theaccount in good standing.

Check the answers and go through the definitions of the credit card related terms with the class.

21


Consumer Credit

Activity 5:Use Credit Card Wisely

How long would it take for Brian to clear his credit card balance if he only pays the minimum every month?

Activity 5 :

With reference to Student Worksheet p. 8-9, ask students to complete the calculation of repayment of Brian’s credit card balance.See next slide for the answers.

22


Consumer Credit

Activity 5:Use Credit Card Wisely




1 3,000.00 150.00

2 2,850.00 49.88 2,899.88 144.99

3 2,754.88 48.21 2,803.09 140.15

4 2,662.94 46.60 2,709.54 135.48

5 2,574.06 45.05 2,619.11 130.96

6 2,488.15 43.54 2,531.69 126.58

7 2,405.11 42.09 2,447.20 122.36

8 2,324.84 40.68 2,365.52 118.28

9 2,247.25 39.33 2,286.57 114.33

10 2,172.25 38.01 2,210.26 110.51

11 2,099.75 36.75 2,136.49 106.82

12 2,029.67 35.52 2,065.19 103.26

Check the answers with the class.

Suggested answers:1. The outstanding balance will be $2,065.19.2. Brian has paid a total of $1,503.73 to his credit card account in the first

year. (i.e. sum of first 12 monthly payments) 3. It’ll take 57 months to settle the $3,000 purchase on credit card if only the

minimum payment is effected monthly. The total repayment amount is $4211.23, 150% of the purchase amount. [Double click on the Excel icon to see the detailed calculation.]

4. Recommend Brian to pay off his credit card as soon as possible. Among different personal credits, credit card usually charges the highest interest rate on unsettled balance, normally between 20 to 30% p.a. In this example, the APR is 21.77% (see Excel spread sheet). If Brian knows it clearly that he is unable to settle the outstanding balance as soon as possible but only to pay for the minimum payment amount each month, he must consider what is he buying – a need or a want.If he is buying the mobile phone for a need, it is better for him to consider if there are any cheaper alternatives in the market. If he is buying the mobile phone for a want, he must understand the great cost of using credit card and ask himself again whether it is the best time to satisfy his want right now. Is it possible for him to postpone the purchase until he can afford it.

23


Consumer Credit

Use Credit Card Wisely

BenefitsConvenience Free credit for a period of timeBuy now pay later

CostsVery high interest chargeEasy to be over-usedHigh level of theft and fraud

Discussion with the class on the benefits and costs of using credit cards.

Advantages:• Convenience, easy to get and easy to use;• Buy now pay later, free credit for a period of time, no interest charge if

settled before the payment due date; and• Other benefits such as discounts, mileage and bonus points.

Disadvantages:• Very high finance cost, interest for outstanding balance is commonly

charged over 20% p.a.; • Easy to overspend causing excessive and/ or unnecessary consumption;

and• High level of theft and fraud.

24


Consumer Credit

Personal Loan and Personal Financial Management

Before raising a loan, consider the Before raising a loan, consider the following factors seriously: following factors seriously:

• Never engage in a loan with monthly loan repayment higher than your monthly surplus (i.e. total income – expenses)

• Think carefully before raising a loan –Monthly loan repayment should be kept below 1/3 of monthly surplus.

Remind students that banks or financial institutions will reach potential borrowers and invite them to raise loans through intensive promotional activities such as TV ad, Internet ad or even cold calls, etc.

One of the useful rules of consumer credit and personal finance is to keep the loan repayment amount below one third of monthly surplus. In other words, after deducting total expenses from total income, not more than one third of this remaining balance should be used on settling debts as this will allow us to have cash flow for non-current expenditures such as doctor consultation fees, car repairs after accident, birthday or wedding presents for friends, etc.

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Consumer Credit

1. Never raise another high-interest loan to meet the repayment

2. Restructuring of debts

3. Settling debts with collateral

4. Going bankrupt

5. The most important thing is …

What to do if becoming insolvent -unable to meet the loan repayment

1. Remind students that many people tend to use credit card to cover loans as it is much easier to be approved than other forms of loans requiring no collaterals. However, It is very unwise to do so as the interest rate high and it will only lead to endless repayments.

2. Restructuring of debts is another way to solve the problem of insolvency. Many banks and financial companies offer such kind of service, helping debtors to develop feasible repayment schedule based on their present financial status. However, teacher should remind students to read the terms carefully before signing up any contracts or agreements.

3. Buying assets such as properties and cars by instalment is a kind of collateralised loan. When a borrower defaults, the final way is to let the lender foreclose or seize the collateral in order to terminate the loan.

4. When debtors (or bankrupts) fail to repay their debts and the Court has granted bankruptcy orders against them, the debtors’ assets are collected and realised(sold off and converted to cash) by a neutral person (known as the “Trustee”). The proceeds from the realisation are then distributed to the creditors for repaying the relevant debts or part of the debts.

During the effective period of the bankruptcy order, part of the debtor’s earnings is utilised for repayment. The Court also investigates the causes of bankruptcy and may punish the bankrupt if any provision in the Bankruptcy Ordinance has been breached.

When the bankruptcy order is discharged, the debtor is free from the monetary liabilities that were incurred before bankrupt.

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Consumer Credit

Reflect on your attitude Reflect on your attitude and mode of spending !and mode of spending !

What to do if becoming insolvent -unable to meet the loan repayment

Remind students their self-control of desires is the key to avoid the problem of insolvency.

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Consumer Credit

The End

End of Lesson 2

Topic C08: Consumer Credit Student Worksheet p.1


BAFS Compulsory Part - Basics of Personal Financial Management Topic C08: Personal Financial Management - Consumer Credit

Activity 1: Case Study Read the case carefully and answer the questions.

Angela’s Study Loan Having been working for 3 years, your cousin Angela has decided to study for a degree on part-time basis. The first year tuition fee of the programme is $30,000. She does not have any savings and wants to borrow a loan from her bank. The bank offers three different types of personal loans, namely, personal instalment loan, revolving credit facility and personal overdraft. Angela is comparing their differences and wondering which one is the best for her. Terms and conditions of the loans are: 1. Personal Instalment Loan

Loan amount: $30,000; Fixed monthly payment; and Three repayment periods at her choice.

Repayment Period

(months) Monthly Repayment

($) Annual Percentage

Rate (%) 12 2,784 22.23 24 1,536 22.42 36 1,122 22.61



2. Revolving Credit Facility Credit limit: $30,000; Interest rate: 1.3% per month (Annual Percentage Rate =

16.7%); and Minimum monthly repayment: 2.5% of outstanding

revolving loan.

3. Personal Overdraft Overdraft limit: $30,000; Interest rate: Best Lending Rate + 7% p.a. (Current Best

Lending Rate is 5.75% p.a.); No minimum monthly repayment; Annual fee of 1% on overdraft limit granted; and No interest charge for unused overdraft.

Angela is currently working as a commission based saleswoman

with a very low basic salary. As her monthly income is not stable, she wants to have flexibility in repaying her loan. Also, she would like to pay as less interest as possible. Which type of loan best suits her need? Please give your reasons.

________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________



Activity 2: To Lend or Not to Lend? Given the following five scenarios, are you willing to lend money to them? And why? Scenario A: You and your classmate Carmen are window shopping in Mongkok

and find that her favorite video game has been launched. Carmen wants to buy the game but does not have enough money right now. She wants to borrow $200 from you. You have lent her money before and she always paid you back quickly.

Your Decision:

□ Yes, reason(s): __________________________________ □ No, reason(s) : __________________________________



Scenario B: Your younger sister wants to buy a comic book when visiting a

book shop with you. She has spent all her pocket money and wants to borrow money from you. You know that she has saved up the red packets she received during the Chinese new year and can pay you back.

Your decision:


Scenario C: You and a new friend are going out for a movie at the weekend.

He asked you to pay for his ticket first and he would pay you back when receiving the wage of his part-time job the next week.

Your decision:




Scenario E: Your basketball teammate wants to borrow $500 from you to buy

a pair of new basketball shoes. You know that he owes other teammates for some time and has not paid back as promised. He offers to let you keep his Nintendo DS until he pays you back.

Your decision:


Scenario D: Your uncle asked you to buy a bottle of red wine for him and said

he would pay you back later. You remind him that he still owes you $20 for the magazine you bought for him, $100 for two film tickets, and $30 for lunch, which he promised to pay back weeks ago.

Your decision:




Activity 3: Payment Flows of a Credit

Card Transaction Rank the sequence of payment flows in a credit card transaction.

Step Description

1 A. Brian uses credit card to purchase his $3,000 mobile phone in

MP Shop.

B. CCA forwards the charge to the credit card issuing bank, Biz

Bank.

C. Biz Bank bills Brian for the $3,000 purchase.

D. MP Shop’s bank reimburses MP Shop $2,940 ($3,000 less a

charge of $60, 2% of purchase amount).

E. Brian pays $3,000 or at least the minimum payment to Biz

Bank.

F. Biz Bank pays CCA $2,970 ($3,000 less an interchange fee of

$30, 1% of the purchase amount).

G. MP Shop submits credit card charge to its bank.

H. CCA forwards payment of $2,970 to MP Shop’s bank.

I. MP Shop’s bank submits the charge to Credit Card Association

(CCA).



Activity 4: Matching Game Match the key terms of credit card with their corresponding descriptions.

Annual fee ․

․

The amount of interest charged on unsettled credit card balance for the billing period.

Cash advance ․

․

The period of time allowed for credit card holders to settle the account without being charged a finance charge.

Credit limit ․

․ A fee charged by card issuers for the use of credit card.

Finance charge ․

․

The minimum amount of the balance a credit card holder is required to pay for the billing period in order to maintain the account in good standing.

Grace period ․

․

The maximum amount of purchase and/or cash advance a credit card holder may use on the credit card.

Minimum payment

․

․ Getting cash from the credit card instead of using it for purchase.



Activity 5: Use Credit Card Wisely Brian purchased a $3,000 mobile phone with a credit card. He plans to pay for the minimum payment amount, which is 5% of outstanding balance or $50 whichever is higher, every month. If he makes no other transactions with his credit card and the credit card issuing bank is charging 1.75% finance charge per month。Calculate Brian’s interest costs and monthly payments in the first year, then answer the following questions. Complete the table:

Month Balance B/F ($)

Interest Amount ($)

New Balance ($)

Monthly Payment ($)

1 3,000.00 0 3,000.00 150.00 2 2,850.00 2,850 x 1.75% = 49.88 2,899.88 144.99 3 4 5 6 7 8 9 10 11 12

Questions: 1. What will be the outstanding balance of Brian’s credit card account at

the end of the first year?

_______________________________________________________

_______________________________________________________



2. How much has Brian totally paid for his credit card in the first year?

(Students are advised to use MS Excel to do the calculation.)

_______________________________________________________

_______________________________________________________

3. How long would it take to clear his credit card debt if Brian continues

to pay the minimum payment every month? What is the total repayment amount?

_______________________________________________________

_______________________________________________________

4. What advice would you give Brian in handling his credit card balance?

_______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________

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BAFS Compulsory Part 1(d) Topic Overview BAFS Compulsory ... · Topic C08: Consumer Credit Topic...

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