Borrowing Money

Borrowing  Get a loan  Repay that amount PLUS interest  Amount repaid depends on: Rate of interest ○ High = more money spent ○ Low = less money spent Amount of monthly payment ○ The higher the payment, the quicker you’ll pay it off

Interest  Interest: payment for using someone else’s money (stated in percentage)  Interest Rate: Percentage charged For lenders, interest = incentive

Loan Agreement  Contract requiring both the borrower and lender to do exactly as stated in the document  Credit card, mortgage, auto, etc.

Basic Components  Amount – Exact amount borrowed (ex. $5,000)  Interest Rate – Rate of interest you’ll pay (ex. 10% or.10)  Payment – EXACT amount you are required to pay back, how often you’ll make a payment (ex. $5,500 over 2 years = $ per month)

More Basic Components  Late Fees – Additional amount owed if a payment is late  Default – What happens if you fail to make a payment. Depending on the type of loans, terms and conditions will vary.

4 Types of Credit  Secured credit  Unsecured credit  Installment credit  Non-installment credit

Secured Credit  Backed by collateral  You pledge something of value to lender  Lender can seize/sell that item if you don’t pay  Often the easiest to obtain  Cars, real estate, jewelry, etc. Easiest to obtain.

Unsecured Credit  Loaner lends based on willingness and ability to repay  Greater risk because of no collateral  Lender looks at credit history  If you fail to pay, lender can sue you  The court can order you to pay Based primarily on how you handled money in the past.

Installment and Non-Installment Installment CreditNon-Installment Credit  Secured (collateral) or unsecured (none) Ex. Credit cards, Auto, personal, education, etc.  Secured (collateral) or unsecured (none) Ex. Cell phone, doctor’s office bill, cable bill

Borrow? Don’t Borrow?  Borrow money when you are investing in the future – not just to buy something you want now.  Borrowing to make minor purchases causes overspending and generates more debt

Borrow? Don’t Borrow?  You’re at the mall with friends and see some jeans you really want, but you don’t have the money to buy them. DON’T borrow Not an investment in future, can cause over spending

Borrow? Don’t Borrow?  You have just graduated from college and have a new job. You have enough money for a down payment on a house, but need a loan to buy the house. BORROW You have a steady income and a home is an investment

Borrow? Don’t Borrow?  You receive a scholarship to go to your favorite college, but it is not enough money to pay all of your expenses. BORROW Education is an investment in yourself.

Module 7.2

Calculating Interest Rates Interest Rate = dollar amount of interest charged amount of money borrowed

Simple Example Borrow: $1,000 Interest Rate: 6% or.06 $1,000 x.06 = $60 You pay $1,000 + $60 $1,060 TOTAL

APR – Annual Percentage Rate  What interest rates are always stated as  The percentage cost of credit on an annual basis, which must be disclosed by the law. More complex than the simple example because few loans are repaid within one year with just one payment.

Finding APR Borrowing 3 months at 6% Step 1: # of months in the year # of months you’re borrowing $ Step 1:12 / 3 = 4 Step 2: rate of interest paid TIMES answer in Step 1 Step 2: 6 x 4 = 24  it’s 6, not.06 APR = 24%

2 years at 6% 1: 12 (# months in the year) 24 (# months borrowed) 12/24 =.5 2: Rate of interest TIMES Step 1 Answer 6 x.5 = 3 APR = 3%

APR  Lenders are REQUIRED to report the APR in bold on the front of all loan contracts  Can be calculated in different ways  Causes confusion  Read all fine print before signing anything

Credit Card Interest Rates  Can range from low (0%) to high (25%+)  Credit card companies can increase interest rates at any time for any reason  Most give 30 days notice  Make sure you read any information sent to you by lender

Making Minimum Payments  A percentage of your balance  Drops as you pay balance  Making ONLY minimum payments means you’ll pay a lot of interest for a long time  GREATLY increases cost of the good/service

Example Amount charged on credit card: $2,400 Minimum payment each month: $48 $ $48 = $2,352 still owed It will take 288 months to pay off that $2,400. In the end you’ll pay $3, $1, in interest

Remember:  That’s ONLY if you don’t charge anything else on that credit card  If you can’t afford to pay off your bill each month, rethink your decision to charge the purchase  Prepayment Clause – allows the borrower to make additional payments/pay off early

Borrowing Money

Before Applying for Loans  It is recommended that you get a copy of your credit report to check it for errors.

Credit History  the way you have handled other loans and payments  includes every application you have made for a loan, a charge account, or a credit card  amount of credit you have  your required monthly payments Lenders want to be sure you have not borrowed so much money that you cannot pay your bills, and they want to see whether or not you pay your bills on time.

Credit Bureau  Compile your credit history into a report  Provides information to lenders and others who need information about you  Specializes in gathering information from various sources  Your credit file may also include information about your Income your work history any legal actions taken against you Number of times you applied for credit

Credit Bureaus  Use the information to develop a credit score based on five major factors: your credit history your current level of debt how long you have used credit the types of credit you have how often you apply for new credit.

FICO (high score = low rates, low score = high rates)  3 main credit bureaus: Equifax, Experian, and TransUnion.  Lenders pay a fee to get your credit file and make their decisions based on your FICO score.  FICO stands for Fair Isaac Corporation  Other factors: income, how long you have worked at your job, the kind of credit you are requesting, and anything else that gives them a complete picture of your ability to repay the loan.

Credit Score Effects  Your credit score impacts more than just your ability to get credit. Getting a job Renting an apartment The rate of interest you are charged when you borrow money

Credit Scores High ScoreLow Score  Good money manager  Pay your bills on time (most important)  Responsible consumer  Show maturity in your actions  Bad money manager  Don’t pay bills on time  Irresponsible  Immature you are a high risk as a potential borrower, renter, or employee

Negative information  Late payments and loan defaults stay in your credit files for seven years  Bankruptcy remains for a maximum of ten years  Information about lawsuits or unpaid judgments remains seven years or until the statute of limitations expires, whichever is longer.

Payday Loan Companies  Offers loans to high risk customers at very high fees

Random Facts  If your credit card is lost or stolen and you report it immediately, the most you can lose is $50.  If you want to dispute any information included in your credit file, you need to write a letter or file a report online with the credit bureau.

Consumer Credit Legislation  ensure that consumers and lenders are treated “fairly” and “equally.”  Provide you with good information to help you make informed decisions about financial matters privacy rights unfair business practices fraud misrepresentation

Enforcing Legislation  Most done by the U.S. Department of Justice or the Federal Trade Commission  State laws vary from state to state  Oklahoma = State Attorney General’s Office

Consumer Credit Legislation

Vocab Review Secured Credit  Credit with collateral for the lender Credit History  An official record of a borrower’s credit activity, including borrowing and payments

Loan Agreement  A type of contract between the borrower and the lender explaining the requirements of fulfilling the loan

Interest Rate  The percentage rate of interest charged to the borrower Interest  Payment for the use of someone else’s money

Installment Credit  A loan repaid with a fixed number of equal payments Credit Bureau  An establishment that collects and distributes credit information of individuals and businesses

Credit Repair Organizations Act  Makes it illegal for groups to make false promises or claims about improving your credit history

Fair Debt Collections Practices Act  Prohibits debt collectors from engaging in unfair, deceptive, or abusive practices when collecting debts

Equal Credit Opportunity Act  Ensures all individuals have an equal opportunity to receive credit or loans

Truth in Lending Act  Requires all lenders to inform potential lenders about the cost of borrowing money, including finance charges and the annual percentage rate

Consumer Credit Reporting Act  Requires free credit reports for the unemployed, persons on public assistance, and fraud victims