credit ~ next steps
Post on 31-Dec-2015
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DESCRIPTIONCredit ~ Next Steps. Homework (Passport Page 38). Welcome!. Paying Down Debt Debt Snowball Predatory Lending Trap Types of Predatory Loans Payday Loans Refund Anticipation Loans Car Title Loans Rent-to-Own Contracts Alternatives to Predatory Loans. How’s It Going?. - PowerPoint PPT Presentation
Credit ~ Next Steps
(Passport page 38)
Welcome!Paying Down DebtDebt SnowballPredatory Lending TrapTypes of Predatory LoansPayday LoansRefund Anticipation LoansCar Title LoansRent-to-Own ContractsAlternatives to Predatory Loans
Hows It Going?
What Do You Know?
(Pre-Test on page 4)
Pay Off DebtStop acquiring new debtEstablish savings Implement a debt snowballList all debts from the smallest balance to largestPay the minimum on everything but the smallest debtPay as much as you can on the smallest debtWhen the smallest debt is paid, take the monthly payment you were making on that debt and add it to the monthly payment you were making on the second smallest debtContinue this process until you are DEBT FREE!!!
Debt Snowball: Example
Predatory Lending TRAP
What is Predatory Lending?UnfairDeceptiveFraudulentPreys on the vulnerableTargets lower-income & minoritieswreaks havocUnreasonable
Non-Mortgage Predatory LoansCar Title LoansRent-to-OwnContractsPayday LoansRefund AnticipationLoans
Payday LoansSmall cash advances ~ $500 or less at a timeMust repay loan back within two weeksPayment Options: Postdated personal checkAuthorization for automatic withdrawal195% APR or higher!The usual cost is $15 for every $100 borrowed for a two week period.
Payday Loan: Example$100 loan( 2 weeks)$15 fee390% APR3,685%EIR
Virginia Payday Loan RegulationsLimited to $500 Only one loan at a timeTerm of the loan must be at least twice as long as your pay cycleCannot be rolled overInterest charge capped at 15%Dont let this fool you!A 15% charge for a 7 day loan is equal to an APR of 780%!
Refund Anticipation LoansShort-term cash advance against an anticipated income tax refundAnnual Percentage Rates from 60% to over 700%Average is 115%Usually beat IRS refund processing by only 5 to 10 days if you e-file
RAL: Real World ExampleFor a tax refund of $2,000, you might pay:RAL loan fee: $75Electronic filing fee: $40Tax preparer fee: $100Total: $215
This is over 10% of your refund!This RAL has an APR of 142%,and it beats the IRS by only 7-10 days.
Car Title Loans
Car Title Loan ProceduresNeed free & clear title
Vehicles value determinedLoan-to-value ratio generally less than 33%
Typical loan is around 25% for 30 days$500 loan becomes a $625 debt (300% APR)
Rent-to-OwnMerchandise is rented (e.g., TV)Weekly or monthly rent until ownedNo interest rate disclosure requiredNo limit to late fees charged if payment missed
Payment$10/ week for 78 weeks
Annual Interest Rate 230%
Alternatives to Predatory LoansSavings accountsSalary advances Loans from friends, relatives, religious institutionsSocial service agenciesWorking out extended repayment plan with creditorsSmall loans from your bank or credit union
Saving Secured Loans/Credit Cards
Uses your savings as collateral You still earn dividendsAvailable credit equals amount in savingsHelp you build your credit scoreAvailable to almost anyone, regardless of your credit history
What Have You Learned?
(Post-Test page 16)
(Passport page 40)
*Review Homework Assignment
Check credit score, evaluate progress Obtain second report from www.annualcreditreport.com and review Develop a debt snowball at www.powerpay.org Pay all monthly bills in full and on time Create a plan for windfalls. What priorities will you fund with extra money? Savings? Debt Reduction? Evaluate savings progress with coach Read Credit Resource Guide: pp. 58 - 59 Read Homework Notes below Reconcile Bank Statement Meet with Coach**Welcome to Credit ~ The Next Steps! Weve learned the basics of credit, so now were going to talk about some of the more in-depth aspects to borrowing money.*Before we get started, how have things been going since our last class? What about savings? Has anyone come close to achieving their savings goal?
Encourage people to share some challenge they have overcome or some thing they learned and applied either from class or from working with their coach. Encourage interaction and give people recognition for the work they have done. *Pre-test on pg 4 of Participant Guide*Debt elimination involves three steps:Stop acquiring new debt. ~ This may seem self-evident, but the reason your debt is out of control is that you keep adding to it.
Establish savings. ~ Why save before paying off debt? Because if you dont save first, youre not going to be able to cope with unexpected expenses. Life happens ~ the car needs new tires, your hot water heater breaks ~ these are the things that drive up debt. If we have savings, though, we become our own lender. How much you need in savings will depend on your personal situation. Families need more in savings that singles and couples. A minimum is $300, but savings $1,000 is a nice, safe cushion. This will not happen over night, but every dollar helps establish this safety net. Remember, this is your savings. Its not to be used to buy shoes or a new Xbox. Youll want to keep the money where you can access it, but dont make it too readily available, especially if youll be tempted to spend it on non-essentials. Consider opening a second savings account. When an emergency arises, you can easily transfer the money to your regular checking account. Itll be there when you need it, but you wont be able to spend it spontaneously.
Implement a debt snowball. After youve established some savings, tackle your debt. The easiest way to pay down debt is with a debt snowball. To create a debt snowball you:List all debts from the smallest balance to largest. Now, mathematically, it makes more sense to list debts based on interest rates and put the highest interest rate at the top. Theres nothing wrong with doing it that way, and a lot of people do. By tackling the smallest balance first, though, you will start to see results faster and that will keep you motivated. Pay the minimum on everything but the smallest debt.Pay as much as you can on the smallest debt!When the smallest debt is paid, take the monthly payment you were making on that debt and add it to the monthly payment you were making on the second smallest debt.Continue this process until you are DEBT FREE!!!
*In this example, there are four credit cards with a total balance of $7,941.
Credit Card #19.50%APR$1,124 balance
Credit Card #27.49%APR$548 balance
Credit Card #38.50%APR$789 balance
Credit Card #46.24%APR$5,480 balance
This person is committing $500 a month to pay off debt. Using a debt snowball to guide them, this person will be out of debt in October 2013.*Paying down debt and sticking to your goals can be hard. Sometimes were tempted to look for other solutions, but rarely are those other solutions helpful in the long run.Perhaps you or someone you know has used a payday lender or title loan company. These type of lenders, along with others, are often referred to as predatory lenders. Predatory lending has become a serious problem. It occurs when companies offer loan products using certain marketing tactics, abusive collection practices, and loan terms that deceive and exploit borrowers.
Today, were going to talk about how you can avoid such lenders and, if youre caught in the predatory lending trap, how to get out of it.**Predatory lending typically describes unfair, deceptive or fraudulent lending practices. While there is no legal definition, a good rule of thumb is imposing unfair and abusive loan terms on borrowers. Predatory lenders grant credit regardless of your credit history or your ability to pay, often with really negative results.
Predatory lenders:prey on the vulnerable and desperate. They offer a quick solution to a financial crisis that often leads to an even worse situation.are one of the most serious threats to lower-income families and minorities. In certain areas of Virginia Beach, there are more predatory lenders than there are federally insured banks and credit unions. often wreaks havoc on your finances. Once youre caught in the predatory lending trap, it can be difficult to get out. Not impossible, though! Well talk about this in a minute.can make it difficult to get reasonable loan terms in the future because it can destroy your credit score.
Abusive practices can occur in the mortgage, home equity, credit card, auto lending, and payday lending markets. Most of the problems are not caused by federally insured financial institutions.*Have you ever seen the ads on TV that make it seem like payday loans are the thing to do if you are short on cash till payday? Or to use your car to get a loan to go on vacation? When the money seems to be easy to get, beware of the strings that are often attached. Theoretically, none of these things in and of themselves are bad. Getting a little extra cash to buy food before your paycheck hits seems reasonable. Unfortunately, its the loan practices themselves that make them predatory in nature.
Today were going to talk about the most common predatory loans:
Payday LoansCar Title LoansRefund Anticipation LoansRent-to-Own Contracts
*Who uses payday loans?The payday loan industry advertises these loans as quick and easy ways to get cash, and targets lower-income working consumers, including welfare-to-work women and others who have little to no savings and live paycheck-to-paycheck.
Most cash-strapped borrowers who get payday loans are not able to repay the whole loan within two weeks and end up rolling over their loan and paying renewal fees multiple time