UGHH… Loans and Repayment

Define or Answer Key Vocabulary Terms Principal Interest Loan  Give 2 examples of types of loans a person can get Loan Term Down Payment Credit Rating Compound Interest Answer: Where do loans come from? What is the benefit for this place to give loans out? Predict: There are benefits to paying a loan balance earlier than expected. What do you think the greatest benefit is?

Answer… Where do loans come from? What is the benefit for this place to give loans out? Bank or Credit Union Profit Economic Stimulation

Things to Know When Taking Out a Loan Principal Interest Rate Loan Term The amount of money that is loaned to you Extra fee paid in addition to the principal The maximum length a bank gives you to pay off your loan

Types of Loans Car House Personal  Business  Credit Card School/Education

Loan Approval What do you need in order to be approved for a loan? Proof of Income Proof of Insurance Proof of Identity Proof of Residence Credit Rating Down Payment

What is… A Credit Rating…?? A number score given to you by 1 of 3 credit companies based on your credit history Typically credit scores range from  The higher the better A Down Payment…?? A percentage of money paid towards an item before taking a loan EX. Car costs- $10,000  10% Down Payment  Down Payment =  Loan Amount =

Identify Tom is going to buy a car for $20,000. His bank is willing to give him a loan at a rate of 3% over 5 years as long as he makes a 20% down payment on the cost of the car. Down Payment = Interest Rate = Principal = Loan Term =

College Loan Types Stafford Loans  “True student loan” and must be paid back with interest  Apply by completing FAFSA form (Free Application for Federal Student Aid)FAFSA  Some loans do not accumulate interest until after graduation  Approx. 5.5% interest Parent Loans for Undergraduate Students (PLUS)  Parents can take out a loan to pay for a student's educational expenses, as long as the student is a dependent undergraduate student enrolled at least half time  The yearly limit on a PLUS Loan is equal to the cost of attendance minus any other financial aid received

Fixed Interest vs. Variable Interest Fixed Interest  A rate that will stay the same over how long your loan term is Variable Interest  A rate that can be changed at any time during your loan term

Compound Interest When and how often interest is applied to your account Yearly  Interest applied once per year  Usually at the beginning or the end of the year Monthly  Interest applied every month (12 times per year) Predict: Which type of compounding (monthly or yearly) do you think will add more money into your account?

How Often Is Your Account Compounded? Your Personal Bank Account Car Loan House Mortgage Student College Loan Monthly Yearly

How Are Interest Rates Determined? State of the Economy  Good economy = higher interest rates  Why… If it is too easy to get money then our economy grows to quickly risking things like inflation  Bad economy = lower interest rates  Why… We want people to spend money (remember the equation) and therefore make it easier to obtain $$

How Are Interest Rates Determined? Your Personal Financial Standing LLoaning to individual people or businesses $$ is risky LLoaners will take into account how risky you are to give money to in determining what your interest rate is TThe better your financial history = lower interest rate HHistory of not paying bills? No credit history? = higher rate

Interest Rates Today Car  0%-18+% House/Mortgage  3.5%-7+% Personal (Bank Loan or Credit Card)  6%-23+%  2014 Average = 14% Personal Bank Account .01%-1%

Take The Next Step… Using one of your careers, take the 2 colleges that you researched and figure out the following:  The Final 4 Year Cost  The Final 4 Year Cost + Estimated Food + Estimated Books  With zero interest, figure how much it would take to pay off your final cost on a MONTHLY basis over 10 years, 20 years, and 30 years

How to Calculate College Payments Food = $5/meal x meals/day x 150 class days x # of years Books = 5 classes per semester x 2 semesters per year x approx. $50 per book x 2 books per class x # of years 10 Years = Final Total/ 120 Payments 20 Years = Final Total/ 240 Payments 30 Years= Final Total/ 360 Payments

Do The Math $100,000 in college fees x 5.5%  Compounded once per year

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For Next Class… Car Loan Interest Rate at 2 area banks Credit Card Interest Rate for a person around your age for 2 Major Credit Cards