essential standard 5.00 objective 5.01
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DESCRIPTIONEssential Standard 5.00 Objective 5.01. Understand credit management. Topics. Main types of credit Common advantages and disadvantages of businesses using credit Cost of credit Main factors examined for granting credit Credit documents Credit regulations Credit assistance. - PowerPoint PPT Presentation
Understand credit management
Main types of creditCommon advantages and disadvantages of businesses using creditCost of creditMain factors examined for granting creditCredit documentsCredit regulationsCredit assistance*
An agreement to obtain money, goods, or services now in exchange for a promise to pay in the future.
When buying on credit, you are delaying the payment for an item.
Buy now and Pay Later
CreditorOne who sells on credit or makes a loanDebtorAnyone who buys on credit or receives a loanObligated to pay back the loan
Promissory Note Legal loan documentWritten promise to repay with interest
Usury Laws State law that restricts the amount of interest that can be charged.
Closed-end creditUsed for a specific purposeLoan of a definite amount of moneyLoan balance reduced with each payment
Example: car loan for $20,000 is a specific, one time amount of money
String examplesOpen-end credit Gives a credit limit - maximum $ you can borrowLoan balance varies for purchases/payments madeExample: credit card with $500 limit. You might spend $50 and pay $10, spend 30 and pay $25. The loan amount revolves as you spend and pay back.
Secured loans:Backed by collateral (help guarantee the repayment of a loan)Backed by a cosigner who agrees to pay
Collateral-asset used as security on a loanCan be taken by creditor if loan payments are not made to creditor
Mortgage loans- real estateSubject to Foreclosure if not paid
Personal loans- car, motorcycle, boatSubject to Repossession if not paid
Responsible for the repayment of a loan if the original party does not pay
Party who signs with applicant for a loan
Who might co-sign a loan for you?
Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
Know what you are signing!Debtors should know the content of the credit contract before signing such as:Amount of finance chargesRepairs covered Add-on featuresReduction of finance charge if contract paid in full prior to ending dateReceive a copy of the contractRepossession conditions
Comes once credit is granted and purchases are made on credit.
Mailed monthly and includes summary of transactions completed during the billing period
May also view online or access info by phone
What kind of information may be found on the statement of account?Previous balanceTransactions:PurchasesReturns PaymentsFinance chargesLate feesRebates or bonuses earnedCurrent Balance Minimum payment dueDue date
Charge AccountsCredit CardsInstallment CreditConsumer LoansPayroll Advance LoansPawn Shop LoansLife Insurance LoansRetirement Plan LoansSmall Business AdministrationBusiness only
Allows debtors to receive goods or services from suppliers and pay for them at a later date
Regular Charge AccountsRequire that you pay for purchases in full within a certain period of timeEX: charge account with an electrician who wired your house
Revolving Charge AccountsAllows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each monthEX: home equity line of credit
Budget Charge AccountsAllows you to pay for costly items in equal payments spread out over a period of timeEX: a charge account with Progress Energy utility company
Retail store, Single Purpose aka charge cardsBalance and payments varyCan only be used to buy goods or services at the business that issued the cardExamples: JC Penney, Sears, BP
Multipurpose, Bank cardsRevolving credit accountsBalance and payments varyMay be used at different locationsExamples: Visa, Master Card
Travel and EntertainmentSimilar to charge accounts Must be paid in full each monthExample: American Express, Diners Clubcompare credit cards
Cash AdvanceBorrow money on a credit cardCosts more than regular credit card purchases*read your contract before signing application or taking a cash advance!
Grace PeriodTime period during which no finance charges will be added to an account. From monthly statement cutoff until payment is due! Maturity (due) date is at least 14 days from statement date. If you pay account in full by due date, you will not usually owe interest.
Many stores provide revolving charge to their customersUsers may earn points, bonuses, rebates or get special unadvertised specials
Examples: Kohls, Sears, Best Buy, Belk
Installment loan - contract issued by the seller that requires payments at specified times such as bi-weekly or monthly until loan is paid in full
Used for: Student, mortgage, automobile loans
Ex: Buy furniture pay monthly to Rooms To Go Furniture StoreEx: borrowing $1000 from a bank and agreeing to make payments $105 for 10 months.
Specialize in loans to people with poor credit ratings
Cost of credit is higher than other institutions
Short-term loanBorrow Until Payday LoanCost is extremely highincludes flat fees, high interest rateYou get cash ahead of getting your paycheck.Secured Loan- secured by promise of paycheck
A short term loanGive up an asset (ring, watch)Pawnshop gives you cashUsually less than 50% of valueYou can get property backTime limit Pay amount & interest chargedPawn shop can sell your itemSecured Loan
Cash Value Insurance whole lifeProvides both savings and death benefitsYou cannot borrow against term life insurance policiesno cash value
*Secured Loan-collateral is $ in cash value
Can legally borrow from them but not recommended since the purpose is to have money when you retire
*Secured Loan- collateral is $ in retirement plan
Small Business Administration (SBA)Offers a number of financial, technical, and management programs to help businessesLoan funds available Info available at local Community colleges
Federal government - uses credit to pay for:Public services and programs provided for its citizensExamples-military, foreign aid, roads, courts, prisonsLoan sources include: Federal savings bonds, treasury bills, bonds, notes
State & local governments-use credit to pay for: highways, water systems, public housing , and stadiums, airportsLoan sources : municipal bonds, school bonds
Municipal BondsState and local governments use to finance projectsSavings BondsSold by federal governmentT-bills, T-notes, T-bonds
Bonds written promise to repay a loan with interest on a specific date
Buyer of the bond is the creditorCorporate BondsUsually used to finance buildings and equipmentBlue chip companies vs. junk bondsPart of investment portfolio
*Bond is an investment for creditor
Marty borrowed $450 for 12 months from First Federal Bank to buy a bike at 8% APR.
Who is the creditor?Who is the debtor?What is the interest rate?What does APR stand for?How much will his monthly payment be?
Creditors have better memories than debtors. -Benjamin FranklinDo you agree or disagree with this quote and why?
ConvenienceShop without carrying cashImmediate PossessionAllows possession of goods or services nowEspecially BIG TICKET ITEMSHomes, business expansionBuy now, pay laterEmergenciesHelps in case of a serious situation
Establishing favorable credit ratingKeeping business separate from personal expensesEarning rewards/pointsMinimizing record-keeping and receiptsKeeping track of what employees are spendingSaving Money Buy item when it is on sale without cashGrowth of the Economy-Buying goods & services helps stimulate the economy
Theft of customer records/databases
Overbuying by employees
Credit Fees - Interest paid on balance
Bad Credit RatingHigher interest rates in futureInability to get loan in future
Repossession/ForeclosureLoss of property because of failure to repay loan
BankruptcyCant qualify for credit for seven years
Using someone elses money has a cost.
Interest is the cost of using someone elses money.
Factors for computing interest include:Principal, P = Amount of the loanInterest Rate, R = Percent of interest charged or earned.Time, T = Length of time for which interest will be charged, usually expressed in years or parts of a year.
Formula for computing simple interest:I = P x R x T
How is time determined for a loan for each of the following lengths?Years multiply by # of yearsMonths ex 2/12Days 24/365How is the maturity date calculated?Months-the maturity date is the same day of the month that the loan was made.Days-Determine the day the loan was made, and then count the exact number of days of maturity.
How is a decreasing loan payment calculated?Interest is calculated on the amount of the loan that is unpaid.
What is disclosed in APR?% cost of credit, service fees*
Credit ApplicationDocumentationProcessingUnderwritingClosing Funding
Form used to provide information needed by a lender to make a decision about granting credit (approving a loan).Fill out completely, accurately, & honestlyRequires signature of applicant, which indicates provided information is true
Credit decision must be based on your ability to repay a loan, Other discrimination is illegal.
Provide the following information:Salary, Employer, Outstanding Credit (Debt), Credit R