Borrowing Basics Showing you the Way

Course Objectives By the end of this course, you will be able to: Define credit Explain why credit is important Distinguish between secured and unsecured loans Identify three types of loans

Course Objectives (Continued) Identify the costs associated with getting a loan Explain why it is important to be wary of rent to own, payday loan, and refund anticipation services Determine if you are ready to apply for credit

“Credit” Defined Credit is money you borrow to pay for goods or services Credit is also called a loan “Good” credit means making payments on time “Bad” credit means it will be harder to borrow in the future

Why is Credit Important? It can be useful in emergencies It’s more convenient than carrying cash It lets you make large purchases It can affect your ability to get employment, housing, and insurance

Collateral Property or another asset you promise to give to the bank if you can’t repay your loan.

Collateral Items Car Savings & Investments Property

Types of Loans Consumer installment loans Credit cards Home loans

Consumer Installment Loan A loan used to pay for personal expenses, such as: Automobile Computer Furniture College tuition

Credit Cards Give you the ongoing ability to borrow money for: Household Family Personal needs

Home Loans Home purchase loans Home refinance loans Home equity loans

Practice Exercise- Types of Loans Instructions: Read the description of the purchase to be made Fill in the blank with the name of the most appropriate loan type for that purchase

The Cost of Credit Fees Interest

Fees Annual Maintenance Fees Service Charges Late Fees

Interest The money financial institutions charge for letting you use their money. Fixed Variable

How much Does Credit REALLY Cost? Amount financed $5000.00 APR 10.05% (credit score 680-719) Term 36 months Finance Charge 547.78 Total Paid $5,547.78 Watch out for “penalty APR’s” and “universal default” on credit cards.

Practice Exercise – Borrowing Money Responsibly Instructions: Read each question carefully Answer the question Be ready to support your answer

The True Cost of Alternative Financial Services Rent to Own Payday loan Services Refund Anticipation Services

Rent to Own Services Allows you to use the item by making monthly or weekly payments The store owns the item until you make your final payment Using rent to own services is more expensive than getting a consumer installment loan

Payday Loan Payday loans are loans that: Are made for a fee to people who need money right away Are paid back with the borrower’s next paycheck Are renewed for an additional fee if not paid off in the agreed-on time period Should be used only for emergencies only

Refund Anticipation Loans These Short term loans are secured by your income tax refund The money for the loans comes from a bank or finance company They are more costly than you might think

The “Four C’s” of Credit Decision Making Capacity Capital Character Collateral

Questions?