Types of Financial Institutions 1. Commercial Banks Bank whos main function is to accept deposits, lend funds, and transfer funds among banks, individuals, and businesses. **Largest amount of funds** Functions: Checking, Savings, Loans for individuals, businesses and between banks. Examples: Any bank we are familiar with: Bank of the West Wells Fargo, Union Bank, First Bank, Etc.
2. Savings and Loan Association Depository institution that accepts deposits and lends funds. Functions: Personal Mortgages Commercial Mortgages Auto Loans Examples:
3. Savings Banks Depository institutions originally set up to serve small savers overlooked by commercial banks. Functions: Similar to S & L Mortgages Personal & auto loans Checking
4. Credit Unions Depository institution owned and operated by its members to provide savings accounts and low-interest loans only to their members. Functions: Lower interest loans Higher interest on savings Examples: NE Educators C.U.; NE Energy Fedl C.U.; Other companies that have C.U.s: Goodyear, State Farm, etc.
5. Finance Company Company that takes over contracts for installment debts from stores and adds a fee for collecting the debt. Consumer Finance Company--makes loans directly to consumers at relatively high interest rates. Examples: Payday Advance companies
Paycheck Advance Companies How do they make sure the borrow will repay their loan? Take care titles as security What do you think would happen if the borrow didnt repay their loan? Loan company would take possession of the car Sometimes charge 30% Can spiral a persons financial situation until youd possibly be paying a whole paycheck in fees.
Charge Accounts- 3 Options Charge Accounts – credit extended to a consumer from a particular store. 1. Regular charge account – pay in full after 30 days No interest if paid in 30 days 2. Revolving charge account – Can make more charges even if you havent paid in full. Interest charged on unpaid balance 3. Installment charge account – equal payments spread over time. Examples: major itemssofas, televisions, refrigerators
What you need to Know! What does this mean? What about interest?
Credit Cards vs. Debit Cards Like charge accounts Can be used at most stores in U.S. and even foreign countries Examples: Visa, Mastercard Can borrow cash (like access to a loan) Must provide a signature Electronic transactions from your bank account Need a PIN instead of signature Do NOT provide loans or credit! Compare & Contrast
Finance Charges & Annual Percentage Rate (The cost of credit) Finance charge – cost of credit expressed monthly in dollars and cents Interest costs plus any other charges connected with credit are taken into account. Computed in 4 Different Ways: 1. Previous Balance 2. Adjusted Balance 3. Average daily Balance 4. Past due Balance
Annual Percentage Rate (APR) Cost of credit express as a yearly percentage. What does that mean? A company that charges 18% APR would charge you $18 ANNUALLY for every $100 unpaid throughout the year
Stores have to pay a percentage of credit purchases to the company that issued the card. Did you know? Why would they accept credit cards? How does this charge get passed on to consumers?
What would you do? What factors in to your decision? How long would you give them to pay it back? A friend wants to borrow money from you. Would you lend it to him or her?
Some Vocabulary Credit Bureau – private business that investigates a person to determine the risk involved in lending to that person. Credit Check – Investigation of a persons income, current debts, personal life, and past history of borrowing and repaying debts. Credit rating – rating of the risk involved in lending to a person or business
Three Cs of Creditworthiness Capacity to Pay ~ How much debt do you have in relation to your income. Character ~ financial reputation as a reliable and trustworthy person. Collateral ~ something of value that a borrower lets the lender claim if a loan is not repaid. Cosigner (if needed) ~person who signs the loan with you and promises to repay if you do not.
Friday Bell ringer #2 Chapter 4 Section 3 Notes Credit Card Comparison If needed, time to finish glue activity from yesterday
Bell Ringer Name 3 of the 5 Cs of Credit Give an example of each
Will you be able to get credit? Several factors determine a persons creditworthiness. When applying for credit: – You will be asked to fill out a credit application. – The lender will hire a credit bureau to do a credit check.credit bureaucredit check – The credit bureau will provide the creditor with a credit rating for you.credit rating
What factors might negatively affect your credit score? Higher the score, the less risk the person represents Higher scores get better interest rates AnnualCreditReport.com Can get a free credit report every 12 months from: Equifax TransUnion Experian
What hurts your credit rating? Late payments High debt-to- income ratio Having many open accounts Previous bankruptcy Unemployment Legal trouble
Secured Loan Unsecured Loan Backed up with collateral. Can be the item being purchased (house, car, etc.) Guaranteed only by a promise to repay it. Not back with Collateral. Interest rate is usually higher Types of Loans
Responsibilities of a Borrower Paying your debts on time Keeping a complete record of all the charges you have made Notifying the issuer if your card has been lost or stolen
GET BOOKS AND NOTES OUT BELL RINGER TIME – FILL IN TWO VOCABULARY WORDS ON NOTES CH. 4-SECTION 4 TODAY: BELL RINGER, SECTION 4 NOTES FINISH GUIDED READING 4-3 & 4-4 – HAND IN REMINDERS: TEST THURSDAY ALL LATE WORK DUE THURSDAY TOO! Monday
Government Regulations of Credit ~ Laws Protecting Borrowers 1. Truth in Lending Act Requires creditors to keep consumers informed about the costs and conditions of borrowing
Laws Continued… 2. Equal Credit Opportunity Act prohibits providers from denying credit based on race, religion, national origin, gender, marital status, or age.
Laws Cont… 3. State Usury Laws restrict the amount of interest that can be charged for credit (usually no more than 18% a year). *Consumer finance companies can still charge higher rates b/c their loans involve higher risks
Personal Bankruptcy Bankruptcythe state of legally having been declared unable to pay off debts owed with available income. Used only as last resort! When bankruptcy is approved through bankruptcy court, debtors must give up most of what they own, which is then distributed to the creditors. – By law, certain debts, such as taxes, must continue to be paid. – Bankruptcy proceedings remain on your credit record for 10 years.