 October 20, 2011 Objective: Students will identify the types of credit available to consumers and the sources of credit.

Secured versus Unsecured  With a secured loan the lender holds collateral to help lower the risk.  Collateral = Property or assets offered to secure a loan or other credit.  Risk = The chance an investment’s return will be less than expected. Risk includes the possibility of losing some or all of the original investment.  With an unsecured loan the lender has no collateral.  This higher risk will mean what to the interest rate?

Types of Credit Auto Loan Mortgage Loan Personal Loan (also called Signature Loan) Credit Cards Student Loan Check Cashing Services Which ones are secured?

Auto Loan An Auto loan is a secured loan. An Auto loan is a term loan, meaning a set amount of money is loaned out with a specific repayment schedule. The lender holds the title to the vehicle until the loan is paid off. If at any point your loan becomes delinquent they can repossess the car and sell it to offset the loss. First National Bank current auto loan rates: – 3.99% % APR based on terms and conditions.

Mortgage Loan  A Mortgage loan is a secured loan.  A Mortgage loan is a term loan… however there are home equity lines of credit that are revolving credit lines.  The lender has a lien on the house until the loan is paid off. If at any point your loan becomes delinquent they can foreclose on the house and sell it to offset the loss.  First National Bank current 30 year fixed rate mortgage is 4.000% Rate and 4.035% APR

Rate versus APR  The interest rate lenders use to determine your monthly payment is only one part of the overall cost of the loan. That’s why it’s misleading to compare loans by looking only at this number.  A better means of comparison is the annual percentage rate, or APR.  The APR formula combines a loan’s interest costs with other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage.  The APR is therefore a better reflection of the true cost of borrowing than interest rates alone and is a good benchmark for comparing loan offers.

Personal Loan  A personal loan is often called a signature loan because the only collateral on the loan is your signature.  A Personal loan is term loan.  What is this going to do to the interest rate?  First National current personal loan rate:  10% - 19% APR based on terms and conditions

Credit Cards  Credit Cards are unsecured revolving lines of credit.  Unlike term loans, with a credit card you are approved for a maximum limit and you can charge up to that amount, and then make monthly payments.  Credit Cards interest rates vary but currently average rates range from % APR

Student Loan  Students loans are unsecured loans.  The payments are deferred (no payment is due) until 6 months after graduation.  The current rate on direct student loans is 3.40% APR… does this fit our rule of risk versus return?  You can not file bankruptcy against students loans, even though there is no collateral the debt will NEVER go away until paid.

Check Cashing  Television commercials aired by Check Cashing companies offer consumers the opportunity to cash a check today and not have it deposited for two weeks.  The ads don't bother to mention the typical 15% fee the company charges for this service, which works out to an interest rate of 400% or more.

Advertising Clouds the Options  Consumers who are presented with advertising from check-cashing services may overlook the possibility of using more traditional, less expensive options, such as a signature loan from a credit union or a credit card.  A substantial number of credit unions have minimum loan amounts of $300 to $500 on signature loans.  Furthermore, the interest paid to a credit union on a signature loan for a full year is likely to be less than what a check casher charges for a single two-week cash advance.

Check Cashing Dependence  Customers are very poorly served by businesses that make such loans.  The high fees make it less likely that a customer will get his financial situation under control and increase the probability that the customer will be back every pay period, drastically impacting the customer's discretionary income.