Chapter 7Chapter 7

Choosing a Source of Credit: Choosing a Source of Credit:

The Cost of Credit AlternativesThe Cost of Credit Alternatives

Kinds of LoansKinds of Loans InexpensiveInexpensive

Parents or family membersParents or family members Borrowed on financial assetsBorrowed on financial assets U.S. Department of EducationU.S. Department of Education

Medium-pricedMedium-priced Commercial banksCommercial banks Savings and loan associationsSavings and loan associations Credit unionsCredit unions

ExpensiveExpensive Finance companiesFinance companies RetailersRetailers Credit cardsCredit cards Tax refundTax refund

Cost of CreditCost of Credit

Finance charge—the total dollar Finance charge—the total dollar amount you pay to use creditamount you pay to use credit

Annual percentage rate (APR)—Annual percentage rate (APR)—percentage cost of credit on a yearly percentage cost of credit on a yearly basisbasis

Credit Trade-offsCredit Trade-offs

Term versus interest costsTerm versus interest costsLender risk versus interest rateLender risk versus interest rate

Variable interest rateVariable interest rateSecured loanSecured loanUp-front cashUp-front cashShorter termShorter term

InterestInterest

Interest = Principle x Rate x TimeInterest = Principle x Rate x TimeSimple interestSimple interestSimple interest on the declining balanceSimple interest on the declining balanceAdd-on interestAdd-on interestOpen-end credit interestOpen-end credit interest

Adjusted balance methodAdjusted balance methodPrevious balance methodPrevious balance methodAverage daily balance methodAverage daily balance method

Other ConsiderationsOther Considerations

Tax deductionsTax deductionsMinimum monthly payment trapMinimum monthly payment trapRule of 78sRule of 78sCredit insuranceCredit insurance

Frequent Reasons for IndebtednessFrequent Reasons for Indebtedness

Emotional problemsEmotional problemsThe use of money to punishThe use of money to punishThe expectation of instant comfortThe expectation of instant comfortKeeping up with the JonesesKeeping up with the JonesesOverindulgence of childrenOverindulgence of childrenMisunderstanding or lack of Misunderstanding or lack of

communication among family memberscommunication among family membersThe amount of the finance chargesThe amount of the finance chargesCheck out danger signals on p. 227Check out danger signals on p. 227

Credit CounselingCredit Counseling

Consumer Credit Counseling Service Consumer Credit Counseling Service (CCCS) provides debt counseling services (CCCS) provides debt counseling services for families and individuals with serious for families and individuals with serious financial problemsfinancial problems

Personal BankruptcyPersonal BankruptcyChapter 7 (straight bankruptcy)Chapter 7 (straight bankruptcy)

Many, but not all, debts are forgivenMany, but not all, debts are forgivenRead detailed description on p. 233Read detailed description on p. 233

Chapter 13 (wage earner plan)Chapter 13 (wage earner plan)A voluntary plan that a debtor with regular A voluntary plan that a debtor with regular

income develops and proposes to a income develops and proposes to a bankruptcy courtbankruptcy court

Read detailed description on pp. 233-234Read detailed description on pp. 233-234Costs include court costs, attorneys’ fees Costs include court costs, attorneys’ fees

and trustees’ fees and costsand trustees’ fees and costs