TYPES OF BORROWING, PART I 5.1 Students can identify different types of borrowing and explain the process of paying back borrowed money.

Investment To put money to use for something offering potential profitable returns (as in interest, income, or appreciation). Appreciation = the value of something goes up over time Depreciation = the value of something goes down over time

Risk and Return Risk = exposure to chance injury or loss Return = exposure to possible gain or reward General Rule = The riskier an investment the greater the potential return

Which of These Are Investments?  Paying rent for an apartment  Buying a house  Buying a car  Paying utility bills (gas, water and electric)  Buying groceries  Taking out a student loan  Taking out a payday loan

Real Estate Property, especially in land When people buy houses, they are also buying the land the house sits on

Types of Borrowing: Mortgage An agreement under which a person borrows money to buy property (usually a house) Usually a 15 or 30 year mortgage Fixed interest rate = the interest rate is locked in to a particular rate (4.37%) Variable interest rate = the interest rate changes over the course of the loan

Types of Borrowing: Mortgage You usually pay off more of the interest first As the loan matures, you pay more of the principal

Types of Borrowing: Mortgage The buyer doesn’t really own the house until the mortgage is paid off The lender may take possession of the property if the borrower fails to repay the money default = failure to repay the loan foreclosure = the process of repossessing a house that has not been paid off

Real Estate: Risk and Return Usually a good investment Property usually appreciates (because the price of houses and land goes up over time) But, not always…

TYPES OF BORROWING, PART II 5.1 Students can identify different types of borrowing and explain the process of paying back borrowed money.

Types of Borrowing: Student Loans Borrowing money to pay for college Federal government loans are usually better than commercial lenders Low, fixed interest rates (~3%)

Types of Borrowing: Student Loans Sometimes limits on how much you can borrow per year Based on need, so feds may deny application if your income is too high As cost of tuition goes up, loans can become burden

1)What? 2)Is there a pattern? 3)Why is the data important?

Student Loan: Risk and Return Can be a good investment if it will lead to a better job and career Can be a problem if you borrow too much. It means you start your career in debt.

Types of Borrowing: Car Loan Paying for new (or used) car month loan = ~6 - 7% The rate you get is based on your credit history – better credit means lower interest rate Loan from a bank usually better than the dealership (but not always)

Car Loan: Risk and Return Car is usually a necessity in American economy Good investment because a car can be resold Some cars retain their value; ALL cars depreciate over time

Types of Borrowing: Collateral loan You agree to use one of your assets as a guarantee that you will pay back the loan. If you default, the lender can take your asset to pay your debt What’s the root?

Types of Borrowing: Payday Loan Cash advance for a paycheck (check cashing loans) Amounts range from $100 - $1,000

Types of Borrowing: Payday Loan Must be 18 years of age; proof of income of at least $1,000 for three months Small, short-term loan usually available to people who have bad credit and can’t get a traditional loan Extremely high interest rates (400%!)

Montel Williams and Money Mutual 1,300%!

Payday: Risk and Return Horrible return! Should never be used except in dire emergency

TYPES OF BORROWING 5.1 Students can identify different types of borrowing and explain the process of paying back borrowed money.