section 6.2 notes. can you afford a loan? first way to tell second way to tell
TRANSCRIPT
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PERSONAL FINANCESection 6.2 Notes
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Can you afford a loan?
First way to tell
Second way to tell
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Debt to Income Ratio
Net Income
Debt to Income Ratio
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Debt to Income Ratio
Your monthly net income is $1,200. Your monthly debts include your student loan payment and a gas credit card, and they total $180. What is your debt payments to income ratio?
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The Cost of Credit
If you are thinking of getting a loan…
Two key factors to consider..
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Finance Charge and APR
The finance charge is the total dollar amount you pay to use credit.
The finance charge is calculated using the APR which is…
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Tackling the Trade Offs
Term vs Interest Costs
APR Term Monthly Payment
Finance Charges
Total Cost
Creditor A
14% 3 Years $205.07 $1,382.52
$7,382.52
Creditor B
14% 4 Years $163.96 $1870.08 $7,870.08
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Lender Risk vs Interest Rate The lender’s goal is to reduce their
risk or make sure you pay back the loan
Options Variable Interest Rate Loans
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Lender Risk vs Interest Rate Secured Loan
Up Front Cash
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Lender Risk vs Interest Rate Shorter Term
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Calculating the Cost of Credit Simple Interest Loans
The interest computed only on the principal or the amount of money that you borrow.
Based on three factors
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Janelle’s cousin agreed to lend her $1000 to purchase a used laptop computer. She has agreed to charge only 5% simple interest, and Janelle has agreed to pay the loan back at the end of one year. How much interest will she pay for the year?
Formula: Principal x Interest Rate X Term
Calculating the Cost of Credit
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Your just bought a used car for $3,500 from your aunt. She agreed to let you make payments for 3 years with simple interest at 6%. How much interest will you pay?
Principal x Interest Rate x Term
Calculating the Cost of Credit
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Calculating the Cost of Credit Simple Interest on Declining Balance
When a simple interest loan is paid back in more than one payment, the method of computing interest is known as the declining balance method.
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Add-On Interest Interest is calculated on the full amount
of the original principal, no matter how often you make payments.
Calculating the Cost of Credit
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Cost of Credit and Expected Inflation
Calculating the Cost of Credit
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Minimum Monthly Payment Trap
Calculating the Cost of Credit
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Minimum Monthly Payment Trap
Calculating the Cost of Credit
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The Five C’s of Credit
Character: Will You Repay the Loan?
Capacity: Can You Repay the Loan?
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Capital: What are your Assets and Net Worth?
Collateral: What if you do not repay?
The Five C’s of Credit
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Credit History: What is your credit history? Do you pay your bills on time? Have you ever filed for bankruptcy? Credit Rating
The Five C’s of Credit
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Assignment
6.2 Assessment Numbers 1, 2, 3, 4, 5
Save as Initials 6.2 Assessment and Upload