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Unit 1 – Personal Finance Credit & Worker Earning How can the use of credit benefit & hurt consumers?

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Presentation on theme: "Unit 1 – Personal Finance Credit & Worker Earning How can the use of credit benefit & hurt consumers?"— Presentation transcript:

1 Unit 1 – Personal Finance Credit & Worker Earning How can the use of credit benefit & hurt consumers?

2 Credit: Interest & Principle When money is borrowed from a bank, the bank makes money by charging interest on the amount borrowed. Some loans can have a fixed rate of interest that never changes over the life of the loan (Ex. 30 year fixed mortgage loans are common- What if interest rates fall?) Some loans can have a variable (changing) interest rate that fluctuate with the prime rate. (Ex. 15 year ARM- adjustable rate mortgage, interest rate will float up and down based on the PRIME.) The principle is the original amount borrowed, plus a percentage charged as interest. ($10,000 for five years at 5%) Types of Loans: Car loans, Mortgage (Real Estate Loans), Credit Cards, Business Loans, Home improvement loans, college loan, etc.

3 Cost & Benefits of Using Credit Benefits Convenience- buy now pay off as you go (allows more people to be able to buy a home or car) Credit Cards- use anytime & anywhere* Costs Increases the total cost of the products we buy with credit (Finance a $20,000 car, you actually pay $21,000) Spiraling Debt- ex. credit cards compound interest every month you don’t pay off the balance- creating deep holes for the unwise!!!!

4 Getting Credit Credit Worthiness: Financial Institutions want to assume as little risk as possible when extending credit (Loaning Money)- Credit Agencies like Equifax analyze your financial worthiness & give a score based on your previous credit history (the higher the credit score the lower the risk for the lender). The Four C’s of Credit: * Capacity – the borrowers ability to pay back the loan (job, income, expenses, etc.) * Capital – income plus money in checking, investments & savings. * Character – past credit record, bill paying records, time in your home, at your job, credit ratings* * Collateral- some loans require down payments or titles to cars or property (if you default you lose the collateral!)

5 The Perils of Using Credit For most INSTALMENT loans (cars, home loans, etc.) banks charge consumers simple interest for an established period of time. (New car loan, you borrow $10,000 at 5% for 5 years = $175/ month, so over the life of the loan you pay the bank back the $10,000, plus 500 in interest) Credit Cards are different & more dangerous (EVIL). 1. Higher interest is charged (ex. 16%) for convenience (use anytime, anywhere) 2. Interest is compounded every month you don’t pay off the balance you are charged on the original amount borrowed, plus any interest charged from a previous balance, and so on………. 3. Interest rates often vary, they tease you with a low rate (5%), then after six months raise the rate to higher (more expensive) rate (15%). 4. Finally, some cards charge an annual fee for the use of the card.

6 Some Examples Simple interest (installment loan) Car Loan- (25,000 X 5% for 6 years) APR – annual percentage rate At the end of the loan I will pay back a total of $26,150. So the banks makes $1,250 for loaning me the principle of $25,000. Monthly payment – $363.19 principle Compound – I use a credit card to go to Vegas – I spend $1000. If I don’t pay off the balance the 1 st month, I get charged 15% interest $150. * If I don’t pay the bill or make a minimum payment of $25. I am charged not only on the original $1000, but also on any interest that has been charged. So, $1,125 x 15% = $1293.75 CREDIT CARDS ARE DANGEROUS!!!

7 Workers Earnings The more you learn, the more you earn!!! Job Market (labor market) is just like any other market in our economy- and the laws of supply & demand apply to jobs just like new cars, shoes, peaches, etc. There is a large supply of people to perform unskilled jobs (washing dishes, flipping burgers), so wages for these jobs are typically low. (The govt. has established the minimum wage to protect unskilled labor) In very skilled jobs where there is a small number of people skilled, trained or talented enough – wages are higher (doctors, surgeons, pro athletes, CEO’s, etc) Education is the path to higher incomes – As you increase your education, training, etc. The number of people with the same education, training, etc. become smaller (supply is low) so, employers have to pay more to attract the skilled candidates.

8 Skills & Occupations Competition in the 21 st century: global, adaptable, flexible, multi-lingual, etc. What occupations are emerging? What occupations are declining?


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