CHAPTER 4 Going Into Debt. Debt = Principal + Interest Credit Receiving money either directly or...
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Transcript of CHAPTER 4 Going Into Debt. Debt = Principal + Interest Credit Receiving money either directly or...
Debt = Principal + Interest
Credit Receiving money
either directly or indirectly to buy goods and services TODAY with the promise to PAY BACK LATER
Principal: amount originally borrowedInterest: amount to be paid for using someone else’s money
Americans and Credit
Definition
CONSUMER DURABLESRepay this type of loan
over a period of time in equal installments (payments).
Examples: mortgage or car loan
Length of loan determines the amount of the payment & interest Longer time period = higher
interest, lower payment
Manufactured items people use for a long time before replacing them
Commonly purchased with installment loans
Installment Loans
MORTGAGEInstallment debt owed
on real estate property (houses, buildings, land)
BUYING ON CREDIT- ASK YOURSELF THIS:
1. Do I really need this item?2. Can I wait for this item?3. If I pay cash, what am I giving up? (opportunity
cost)4. Will the satisfaction I get from an item be
greater than the interest I have to pay?5. Have I done comparison shopping?
% rates Loan rates Prices
6. Can I afford to borrow or use credit now?7. Will I be over my limit?
HOME MORTGAGE
1. Use the real estate flyers to select three properties of varying prices.
2. Calculate the total interest (I=principal x interest x years) & total payout (total interest + principal) for the following conditions on EACH property.
Example: I = 100,000 x .0375 x 15Example: TP = 56,250 + 100,000
30 year, 5.25% 20 year, 4.25% 15 year, 3.75%
3. Calculate the MONTHLY payment for each loan set. (monthly payment = total payout / total months of loan)Example: MP=156,250/180
4. Using the “Buying on Credit” analysis, which property would you purchase at which term rate and WHY?
Mortgage
15 year(180)
20 year(240)
30 year(360)
1. Price
$100,000
I: $56,250TP: $156,250
Monthly Pmt.$868
I:TP:
Monthly Pmt.
________
I:TP:
Monthly Pmt.
________
2. Price
_____
I:TP:
Monthly Pmt.
________
I:TP:
Monthly Pmt.
________
I:TP:
Monthly Pmt.
________
3. Price
_____
I:TP:
Monthly Pmt.
________
I:TP:
Monthly Pmt.
________
I:TP:
Monthly Pmt.
________
Match institutions to the main functions:
A. Commercial BankB. Charge AccountsC. Consumer Finance
CompaniesD. Savings BanksE. Credit UnionsF. Savings & Loans
(S&L)
accept deposits, loan $, transfer funds from one bank, individual, or business to anothermortgage loans (single and multifamily), commercial mortgage, auto loans, accepts depositssavings accts., home loans, checking accts. at lower interest rates, “small savers”owned & operated by its members, provide checking & savings accts. at higher interest, loans at lower interesttakes over installment debts & adds a collection fee, higher interest fees, loan to “high risk”allows customer to buy goods or services from a particular company & pay them later
Types of Financial Institutions
Match institutions to the main functions:
A. Commercial BankB. Charge AccountsC. Consumer Finance
CompaniesD. Savings BanksE. Credit UnionsF. Savings & Loans
(S&L)
accept deposits, loan $, transfer funds from one bank, individual, or business to anothermortgage loans (single and multifamily), commercial mortgage, auto loans, accepts depositssavings accts., home loans, checking accts. at lower interest rates, “small savers”owned & operated by its members, provide checking & savings accts. at higher interest, loans at lower interesttakes over installment debts & adds a collection fee, higher interest fees, loan to “high risk”allows customer to buy goods or services from a particular company & pay them later
Types of Financial Institutions
A
F
D
E
C
B
REGULAR CHARGE ACCT.
“30 day charge” with a credit limit
Credit limit: max amount of goods or services a person or business can buy on the promise to pay in the future (usually $500-$1000)
Process: bill sent at end of 30 days; 0% interest charged if paid in full before interest is charged at the end of the month (billing cycle)
CHARGE ACCOUNTS
Revolving Charge Account
Allows you to make additional purchases from the same store even if previous month’s bill is not paid in full
Terms: usually must pay 1/5th of balance interest; has a credit limit
No “common lender” symbol in corner
Credit Card
Like a charge card only can be used at many random stores, resturants, businesses, etc.
Terms: Varying credit limits Higher interest rates (10%-30%
range based on credit score) Special rates to reliable
customers
COMMONLY HAVE THESE LOGOS
Debit Card
“Check Card” – works like a check from your checking or savings account at a banking institution
Transfers funds electronicallyOnly funds IN your account are
accessible for use through the card
Can be used for ATM withdrawal of cash
No interest charge, but fees!!! Rules are decided at each bank.
Finance Charges and Percentage Rates
Finance Charge Cost of credit expressed in $ and includes interest
costs plus other charges connected to credit (annual membership fee)
Computing finance charge (4 ways): Previous balance Average daily balance Adjusted balance Past due balance
Creditors must inform you which method is being used.
Annual Percentage Rate (APR) Cost of credit expressed as a yearly percentage
See Page 93
How do I apply for credit?
1. Know who is watching: Credit Bureau
A private business hired to do a credit check.
Credit Check An investigation to reveal
current income, debts, detailsof personal life, repaymenthistory
Completed prior to MOST financial transactions or even prior to obtaining employment
CAPACITY TO PAY
CHARACTER
Related to income & debt
Spotty employment = questionable record
Factor in current amount of debt
If debt is high, reluctant to loan
Reputation of being trustworthy & reliable
Educational background
Trouble with law or criminal background = reluctant to loan
3 Credit Check Factors
COLLATERAL
Capital (personal wealth)
Past ability to save & accumulate
Personal ability to pay (able to sell items of value)
Credit Rating
Information is supplied by the credit bureau which determines rating or risk – good, average, or poor.
This determines if a creditor will lend money to you and at what price = “CREDITWORTHINESS”
Factors to “poor” credit rating: not paying
bills on time, inconsistent employment, debt delinquency, criminal record, high
debt/low income
SECURED LOANS UNSECURED LOANS
A loan that is backed up with collateral
Signed legal agreement
Example:Auto loan / title of car or repossession
When a loan is granted without collateral
Based on reputation alone
Co-signer – person who signs the loan contract along with borrower & promises to repay the loan if the borrower does not
TYPES OF LOANS
Responsibility as a Borrower
Paying on time! Past due notices –
received if you are late in paying
Collection agency – extensive late payment leads to “aggressive” collection
Late or non-payment = increase in cost for ALL customers
Keeping records!! Track credit purchases
and KNOW what you have borrowed!
Notify immediately if credit cards or ID are lost or stolen
Thieves are not all as obviousas him!
Government Regulation on Credit
Usury Law Law restricting the
amount of interest charged for credit
Recently changed to help consumers
Higher rates can be charged on loans of higher risk
Personal Bankruptcy The inability to pay debts
based on the income received or the condition in which debtors give up most of what they own for distribution to creditors
Should be a last resort Stays on credit history
for 10 years Offers a fresh start but is
difficult to get future credit!