borrowing money. borrowing get a loan repay that amount plus interest amount repaid depends on:...
TRANSCRIPT
MODULE 7.1REMEMBER THE
INTEREST
Borrowing Money
Borrowing
Get a loan Repay that amount PLUS interest Amount repaid depends on:
Rate of interest○ High = more money spent○ Low = less money spent
Amount of monthly payment○ The higher the payment, the quicker you’ll pay
it off
Interest
Interest: payment for using someone else’s money (stated in percentage)
Interest Rate: Percentage charged
For lenders, interest = incentive
Loan Agreement
Contract requiring both the borrower and lender to do exactly as stated in the document
Credit card, mortgage, auto, etc.
Basic Components
Amount – Exact amount borrowed (ex. $5,000)
Interest Rate – Rate of interest you’ll pay (ex. 10% or .10)
Payment – EXACT amount you are required to pay back, how often you’ll make a payment (ex. $5,500 over 2 years = $229.70 per month)
More Basic Components
Late Fees – Additional amount owed if a payment is late
Default – What happens if you fail to make a payment.
Depending on the type of loans, terms and conditions will vary.
4 Types of Credit
Secured credit Unsecured credit Installment credit Non-installment credit
Secured Credit
Backed by collateral You pledge something of value to lender Lender can seize/sell that item if you
don’t pay Often the easiest to obtain Cars, real estate, jewelry, etc.
Easiest to obtain.
Unsecured Credit
Loaner lends based on willingness and ability to repay
Greater risk because of no collateral Lender looks at credit history If you fail to pay, lender can sue you The court can order you to pay
Based primarily on how you handled money in the past.
Installment and Non-Installment
Installment Credit Non-Installment Credit
Secured (collateral) or unsecured (none)
Ex. Credit cards, Auto, personal, education, etc.
Secured (collateral) or unsecured (none)
Ex. Cell phone, doctor’s office bill, cable bill
Borrow? Don’t Borrow?
Borrow money when you are investing in the future – not just to buy something you want now.
Borrowing to make minor purchases causes overspending and generates more debt
Borrow? Don’t Borrow?
You’re at the mall with friends and see some jeans you really want, but you don’t have the money to buy them.
DON’T borrow
Not an investment in future, can cause over spending
Borrow? Don’t Borrow?
You have just graduated from college and have a new job. You have enough money for a down payment on a house, but need a loan to buy the house.
BORROW
You have a steady income and a home is an investment
Borrow? Don’t Borrow?
You receive a scholarship to go to your favorite college, but it is not enough money to pay all of your expenses.
BORROW
Education is an investment in yourself.
It Is In Your InterestModule 7.2
Calculating Interest Rates
Interest Rate
=
dollar amount of interest charged
amount of money borrowed
Simple Example
Borrow: $1,000
Interest Rate: 6% or .06
$1,000 x .06 = $60
You pay $1,000 + $60
$1,060 TOTAL
APR – Annual Percentage Rate
What interest rates are always stated as The percentage cost of credit on an
annual basis, which must be disclosed by the law.
More complex than the simple example because few loans are repaid within one year with just one payment.
Finding APRBorrowing 3 months at 6%
Step 1: # of months in the year
# of months you’re borrowing $
Step 1: 12 / 3 = 4
Step 2: rate of interest paid TIMES answer in Step 1
Step 2: 6 x 4 = 24 it’s 6, not .06
APR = 24%
2 years at 6%
1: 12 (# months in the year)
24 (# months borrowed)
12/24 = .5
2: Rate of interest TIMES Step 1 Answer
6 x .5 = 3
APR = 3%
APR
Lenders are REQUIRED to report the APR in bold on the front of all loan contracts
Can be calculated in different ways Causes confusion Read all fine print before signing
anything
Credit Card Interest Rates Can range from low (0%) to high (25%+) Credit card companies can increase
interest rates at any time for any reason Most give 30 days notice Make sure you read any information
sent to you by lender
Making Minimum Payments A percentage of your balance Drops as you pay balance Making ONLY minimum payments
means you’ll pay a lot of interest for a long time
GREATLY increases cost of the good/service
Example
Amount charged on credit card: $2,400
Minimum payment each month: $48
$2400 - $48 = $2,352 still owed
It will take 288 months to pay off that $2,400. In the end you’ll pay $3,456.59
$1,056.59 in interest
Remember:
That’s ONLY if you don’t charge anything else on that credit card
If you can’t afford to pay off your bill each month, rethink your decision to charge the purchase
Prepayment Clause – allows the borrower to make additional payments/pay off early
7.3Borrowing Money
Before Applying for Loans It is recommended that you get a copy
of your credit report to check it for errors.
Credit History the way you have handled other loans and
payments includes every application you have made
for a loan, a charge account, or a credit card amount of credit you have your required monthly payments
Lenders want to be sure you have not borrowed so much money that you cannot pay your bills, and they want to see whether or not you pay your bills on time.
Credit Bureau Compile your credit history into a report Provides information to lenders and others who
need information about you Specializes in gathering information from
various sources Your credit file may also include information
about your Incomeyour work historyany legal actions taken against youNumber of times you applied for credit
Credit Bureaus
Use the information to develop a credit score based on five major factors:your credit historyyour current level of debthow long you have used creditthe types of credit you havehow often you apply for new credit.
FICO (high score = low rates, low score = high rates)
3 main credit bureaus: Equifax, Experian, and TransUnion.
Lenders pay a fee to get your credit file and make their decisions based on your FICO score.
FICO stands for Fair Isaac Corporation Other factors: income, how long you have
worked at your job, the kind of credit you are requesting, and anything else that gives them a complete picture of your ability to repay the loan.
Credit Score Effects
Your credit score impacts more than just your ability to get credit.Getting a job Renting an apartmentThe rate of interest you are charged when
you borrow money
Credit Scores
High Score Low Score
Good money manager Pay your bills on time
(most important) Responsible consumer Show maturity in your
actions
Bad money manager Don’t pay bills on time Irresponsible Immature
you are a high risk as a potential borrower, renter, or employee
Negative information
Late payments and loan defaults stay in your credit files for seven years
Bankruptcy remains for a maximum of ten years
Information about lawsuits or unpaid judgments remains seven years or until the statute of limitations expires, whichever is longer.
Payday Loan Companies
Offers loans to high risk customers at very high fees
Random Facts
If your credit card is lost or stolen and you report it immediately, the most you can lose is $50.
If you want to dispute any information included in your credit file, you need to write a letter or file a report online with the credit bureau.
Consumer Credit Legislation ensure that consumers and lenders are
treated “fairly” and “equally.” Provide you with good information to
help you make informed decisions about financial mattersprivacy rightsunfair business practicesfraudmisrepresentation
Enforcing Legislation
Most done by the U.S. Department of Justice or the Federal Trade Commission
State laws vary from state to state Oklahoma = State Attorney General’s
Office
7.4 (ACTS)Consumer Credit Legislation
Vocab Review
Secured Credit Credit with collateral for the lender
Credit History An official record of a borrower’s credit
activity, including borrowing and payments
Loan Agreement
A type of contract between the borrower and the lender explaining the requirements of fulfilling the loan
Interest Rate
The percentage rate of interest charged to the borrower
Interest Payment for the use of someone else’s
money
Installment Credit
A loan repaid with a fixed number of equal payments
Credit Bureau
An establishment that collects and distributes credit information of individuals and businesses
Credit Repair Organizations Act
Makes it illegal for groups to make false promises or claims about improving your credit history
Fair Debt Collections Practices Act
Prohibits debt collectors from engaging in unfair, deceptive, or abusive practices when collecting debts
Equal Credit Opportunity Act
Ensures all individuals have an equal opportunity to receive credit or loans
Truth in Lending Act
Requires all lenders to inform potential lenders about the cost of borrowing money, including finance charges and the annual percentage rate
Consumer Credit Reporting Act
Requires free credit reports for the unemployed, persons on public assistance, and fraud victims