Borrowing Basics…. What is Debt? Debt is money which one person is obligated to pay another Money...
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Transcript of Borrowing Basics…. What is Debt? Debt is money which one person is obligated to pay another Money...
Borrowing Basics…
What is Debt?Debt is money which one person is obligated to pay anotherMoney owed to banks, credit card companies; relatives; car loan/lease
Monthly bills such as telephone, hydro, etc. when paid by the due date are NOT considered debt
• A Presumption on the Future James 4:13-15
• Debt is to be avoided - Let no debt remain outstanding (Romans 13:8)
• Debt is compared to slavery -The rich rule over the poor, and the borrower is the servant to the lender (Proverbs 22:7)
• Worries about Debt can choke out faith (Mark 4:18-19)
Money can be borrowed for: Home Mortgage Vocation (school) Business
ONLY if all 3 of the following criteria are met 1. The item purchased produces an income or will
appreciate in value 2. The value of the item equals or exceeds the amount
owed against it (most car loans would not qualify)
3. The debt is not so high that the repayment puts undue strain on your budget (most lenders do not consider this)
When can we borrow money?Guiding Principles from Crown Financial Ministries
DEBT 101
• The money you originally borrow is called principal. • To borrow money, you must pay a premium, which
is called interest.• Interest is the cost associated with borrowing
money.• The Total Cost of Borrowing includes the
Principal + Interest (not simply the monthly payments)
Banks are in the business of lending moneyThey evaluate your credit worthiness in several ways:
> They look at your credit history (how much of a risk)> They calculate your Debt Serving Ratio
Total Debt Serving Ratio = total monthly debt expenses total monthly gross income
Gross Income – includes all deductions Monthly Debt Expenses – They only consider debt expenses –
mortgage/rent, % of credit card balances, other debts – car loan, lease, family/student loan; They don’t consider other expenses such as food, clothing, transportation, insurance, heat, hydro, giving, etc. (even though they are part of your budget)
Understanding the Lending Process
If this ratio is 40% or less, then it is ‘okay’ – or they may say ‘only with a co-signer’
Do NOT co-signer or ask anyone to be one for you!(Proverbs 17:18)
Terms (how much they will lend you and at what interest rate) will be based on the criteria we mentioned
• Many qualify for loans that they cannot afford
• Having a Budget in place is the only way to pre-determine how much loan you can actually afford
The Problem...
“PayDay Loan” MathCash Advance = $500Fee = $25/$100 (25% interest?)
Cost of Borrowing = $625
25% interest per 2 weeks25% x 26 2-week periods / year
25 x 26 = 650% interest!!!!
> This assumes you pay the loan back on time and do not incur any additional late charges
Compounded over 1 year?(1.25) 26 = $32,987%
Shop Smart• In addition to ‘Borrow Smart’ - ‘Shop Smart’• Understand the difference between
‘frugal’ & ‘cheap’ (the lowest price is not always the smartest)
• Think before you buy – ask yourself: ‘Is this a ‘need’ or a ‘want’’
• Take inventory (track) before you buy (groceries, clothing, cars, etc.)
• Shop on price – not on payment(electronics, cars, mortgages, etc.)
• DO NOT SPEND $$ TO SAVE $$
Do you know what your Credit Score is?
Credit Report – lists all your credit accounts and indicates if there are in good standing, your payment history and the timeliness of your payments, even lists accounts that have been closed.
Credit Score – a number between 300 and 900 that gives an indication of whether you are a high risk (closer to 300) or a low risk (closer to 900);
(Your credit score is also called a FICO score – Fair Isaac Corporation – after the company that created the credit score)
Understanding your Credit Rating
Checking Your Credit Scores…
• Your two individual scores (TransUnion & Equifax) should be similar to each other (within 50 points).
• If they differ more than 50 points, something may have been misreported to one of the bureaus.
• Check for things like late payments, new accounts that have been opened that you do not recognize, loans that should be closed and are still listed as opened.
• If you believe there is something listed in error, contact that particular creditor and ask them to correct it.
Factors that affect your Credit Score
FICO scores consider your credit history over several years, making it difficult to increase your credit score in the short run. However you can improve your credit-worthiness by:
Pay your bills on time & in full Do not apply for credit frequently Reduce your credit-card balances Reduce your total indebtedness Closing unneeded credit accounts Avoiding bankruptcy
and foreclosures
How can I increase my Credit Score?
MORTGAGES
Know Both Your Credit ScoresBefore Buying a Home…
Your credit score is important in determining if you qualify for a mortgage and, if so, at what interest rate.
For example – on a $200,000 mortgage, someone with a good score of 760 or higher will pay nearly $200 less per month than a person with a bad score of 639 or lower.
• When applying for a mortgage, both you and your spouse’s scores will be taken into account (from all available bureaus)
• These scores will be the base of your lender’s decision of whether to offer you a loan, and at what rate – based on the lower of both your middle/average scores.
You have a much better negotiating position when your financial house is in order and your credit score is good
The amount you can pay each year in addition to regular payments without penalty is negotiable
The interest rate is negotiable Consider changing the frequency of your payments
(with caution) to pay down mortgage sooner…
EVERYTHING IS NEGOTIABLE!
The interest rate you are assessed will make $1000’s of dollars difference in how much Total Interest you will pay
Interest is NEGOTIABLE!
https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi/start
Payment Frequency is NEGOTIABLE!
Mortgage Insurance?
• Depending on your age & health – you may not want the Bank Mortgage Insurance…
• Consider all your options – including Term Insurance• Do NOT Lie/Mislead on your application
AUTO FINANCING
Thinking of LEASING?
Think Again!• There is NO economic value in an
individual leasing a vehicle• There is no
equity/ownership• Penalties for
excess mileage and condition
• Rate is based on the highest price-point possible
The Truth about 0% Financing
Only 1/3 of buyers qualify for 0%; Only 10% of qualifiers will get 0% Many buy much more car than
they intended Other limitations: forced to buy
new car, limited inventory, shorter loan terms, lower trade-in credit, & no cash back incentives
Annual % Rate 0% 6.95%
Cost of Car $29,999 $29,999
Less Rebate $0 $5,000
Amount to Finance $29,999 $24,988
Monthly Payment $625 $596
Total Cost $29,999 $28,608
SAVINGS $0 $1,392
Example : mid-size sedan (not including taxes, administration or other fees dealer may charge)
Annual % Rate 0% 6.95% (Used Car)
Cost of Car $29,999 $19,999
Less Rebate $0 N/A
Amount to Finance $29,999 $19,999
Monthly Payment $625 $478
Total Cost (incl. interest) $29,999 $22,944
SAVINGS $0 $7,055
Comparison of new mid-sized sedan against same (but used) vehicle, same model year with 10,000 km
Do you really need a Car Loan?
Auto Loans are NOT a fact-of-life! Recommend putting as much down as
possible and keeping the car loan to a 4-year maximum
Payments should be kept to 10-20% of net pay (depending on other debt)
The Path to Zero Car Loans…
$500 / month …
New Used Car(Paid with Cash)
$ To Savings Account
New Car Loan
$500 / month …
$ To Car Loan
Credit Cards
The Truth about Credit Cards
Credit Cards are a great convenience – • Airline Travel• Car Rental• On-line Purchases (software updates, etc.)• Track expenses for work
However, owing money on a credit card forces us to continually pay for the past rather than investing in the future!
Credit card debt accumulates quickly and can be difficult to pay for 3 reasons –
1. High Interest Rates (bad debt & high risk)typically 17 – 22% (store credit cards can charge 28 – 32%)
2. Minimum Payments between 2 - 6 % which barely covers the interest charges on the card
3. Interest is calculated and charged daily – not monthly
Credit Card Cautions
Research indicates that people spend on average 22% more when using a credit card compared to paying cash
• Low Introductory Rate Cards• Zero % for 6 month Promotions• Loyalty Cards• Reward Cards
4 Smart Rules for Credit Card Use
1. Use credit cards only for pre-planned, budgeted items (PLAN)
2. Record your credit card spending as you spend (TRACK)
3. Pay your credit card balance in full each month
4. If you won’t take the first 3 steps, STOP using your credit cards!
How Many Cards Do I Need?
• The average person will carry 9-12 credit cards; but many carry many, many more (especially with the push of Loyalty Cards)
• Recommend that you carry only 2 – in case there is a security problem with the one, you have the second as a backup (especially if you are on the road)
• Easier to contact 2 than 12 if your wallet is ever stolen
REMEMBER: It’s NOT Our Money….
• If it really is God’s money, then every decision we make about what we do with money – how we earn it, how we treat it, how we manage it and even how we spend it – is a spiritual one.“If we ask what else we can do with our money – that is, if we don’t squander it, hoard it, or preserve it – the answer would seem to be that we can use it, and the missional church can help people try to figure out how to do that in ways that fulfill the mission of God… that we not simply use a portion of our money in godly ways (for example, giving to the church) but that we spend all of it in ways that are pleasing to God and that support God’s mission in the world.” Mark Allan Powell, Stewardship for the Missional Church, Word & World Supplement Series 6, 2010