E P F. 1 3 A   E VA LU AT E T H E VA R I O U S M E T H O D S O F F I N A N C I N G A P U R C H A S E

E P F. 1 3 H C O M PA R E T H E C O S T S A N D C O N D I T I O N S O F S E C U R E D A N D U N S E C U R E D L O A N S

E P F. 1 3 G E X P L A I N T H E N E E D F O R A G O O D C R E D I T R AT I N GE P F. 1 3 C I D E N T I F Y Q U A L I F I C AT I O N S N E E D E D T O O B TA I N C R E D I T

E P F 1 3 D I D E N T I F Y B A S I C P R O V I S I O N S O F C R E D I T A N D L O A N L AW S

13 Credit & Loan Functions

THERE ARE VARIOUS METHODS OF FINANCING A PURCHASE. A DECISION-MAKING MODEL CAN HELP DETERMINE

WHICH IS BEST IN A GIVEN CASE.

EPF.13a Evaluate the various methods of financing a purchase

What are some of the methods for financing a purchase?

installment plan layaway secured and unsecured loans.

What are some of the sources of financing?

retail stores banks and credit unions finance companies pawn shops payday loans title loans private lenders.

What are some types of credit?

open-end credit closed-end credit service credit revolving credit secured loans unsecured loans.

How would a decision model help decide which method is best in a give case?

To use a decision model to determine which type of financing would be best, first establish the criteria.

What is the opportunity cost of credit?

the resulting decrease in future purchasing power;

the individual will have less money to spend in the future as some of it will go toward repaying the loan or paying a credit card bill.

SECURED AND UNSECURED LOANS SHOULD BE ANALYZED WITH REGARD TOT HE COSTS AND

CONDITIONS OF THE LOANS.

EPF.13h compare the costs and conditions of secured

and unsecured loans

Secured vs. Unsecured Loans

A secured loan is one in which the borrower risks loss of an asset (e.g., automobile, house) if unable to repay.

An unsecured loan is made without the borrower offering any assets and is based on the borrower’s credit rating alone.

What are some of the costs and conditions to consider with secured and unsecured loans?

annual percentage rates finance charges monthly payments annual fees transaction fees length of time to repay the loan total amount required to pay off the loan loss incurred should the loan not be repaid

on time.

THERE ARE BENEFITS TO A GOOD CREDIT RATING. THERE ARE COSTS TO A POOR

CREDIT RATING.

EPF.13g explain the need for a good credit rating

Who calculates and reports credit ratings?

Credit reporting agencies have established formulas to produce credit scores for each borrower.

How is one’s credit rating measured?

Credit ratings are based on information in a person’s credit record, including: income, payment history, employment record, and other personal factors.

How can a good credit rating be established?

Making payments (e.g., bills, rent) on time helps an individual establish and maintain good credit.

Good credit scores may enhance one’s ability to borrow and the interest rate charged.

Credit scores may also help decrease one’s insurance rates and improve employment options.

What are some of the consequences of a poor credit rating?

Poor credit can adversely affect one’s ability to: get a job, rent an apartment, obtain a car loan, obtain security clearance — and may even bring an increase in car insurance.

Individuals should access their own credit reports before applying for credit or when denied credit.

How can one correct an error on one’s credit report?

Tell the consumer reporting company, in writing and with supporting documents, what information is inaccurate.

The consumer reporting company then must investigate the issue and correct the error.

CHARACTER, CAPACITY, CAPITAL, CONDITIONS AND COLLATERAL ARE

FACTORS THAT DETERMINE CREDITWORTHINESS.

EPF.13c identify qualifications needed to obtain credit

In terms of credit, what do character, capacity, capital, conditions & collateral mean, and how are they

measured?

Character refers to a borrower’s history of paying obligations.

Capacity refers to one’s ability to repay and is usually measured by current income and level of outstanding debt.

Capital refers to savings and other assets one can use to repay.

Conditions refer to other circumstances that may impact the ability to obtain credit (e.g., economic conditions).

Collateral refers to assets the borrower has that could be taken by the lender if the borrower fails to repay.

THERE ARE LAWS RELATED TO CREDIT AND LOAN PRACTICES

EPF13d identify basic provisions of credit and loan laws

What are some of the laws that affect credit and loans?

Fair Credit Reporting Act — regulates consumer reporting agencies and the use of consumer credit information

Fair Credit Billing Act — protects consumers against inaccurate and unfair credit billing and credit card practices and provides consumers with a mechanism for addressing billing errors

Equal Credit Opportunity Act — prohibits creditors from discriminating against a credit applicant on the basis of race, color, religion, national origin, sex, marital status, or age or because the applicant receives public assistance

Fair Debt Collection Practices Act — prevents abusive and deceptive practices by debt collectors

Credit Card Accountability, Responsibility, and Disclosure (CARD) Act — bans unfair rate increases and unfair fees, requires that credit card contract terms be presented to consumers in clear language, and ensures accountability from credit card issuers and regulators