Chapter 7: Planned Borrowing

Objectives Discuss the elements of the planned use of credit. Establish your own debt limit. Understand the language of consumer loans. Describe the sources of consumer loans.

Objectives Calculate the APR and finance charges on both single-payment and installment loans. Recognize signs of over-indebtedness, know what to do when it occurs, and explain your rights regarding credit collection and bankruptcy.

Planned Borrowing Most people use installment credit 12+ times during their life. Yet, only 1:3 shop for credit terms! DID YOU KNOW!

Planned Borrowing A knowing decision to borrow to finance a purchase or simply to borrow cash.

Planning Your Credit Usage When How often How much THE TASK OF DETERMINING:

The debt limit most people establish for themselves is lower than what lenders would be willing to lend. Establishing a Debt Limit

Debt-payments-to-disposable-income method Ratio of debt-to-equity method Continuous-debt method Establishing a Debt Limit

Credit Capacity Indicators * Not including housing Debt Payments-to-Income Ratio monthly payments* monthly after tax income 6-9

Credit Capacity Indicators Debt To Equity Ratio total liabilities net worth* = Should be < 1 *Excluding home value 6-10

Debt-Payment Limits as a Percentage of Disposable Income Percent For Current Debt* Take on Additional Debt? 10 or lessSafe limit; borrower feels little debt pressure. Could be undertaken cautiously. 11 to 15Possibly safe limit; borrower feels some pressure. Should not be undertaken. 16 to 20Fully extended; borrower hopes that no emergency arises. Only the fearless or foolhardy ask for more. 21 to 25Overextended; borrower worries about debt No, borrower should see a credit counselor. * Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives.

If one of the earners reduces/eliminates earnings, debts that had been manageable with two incomes may become overwhelming. Setting Debt Limits for Dual-Earner Households BEWARE!

Installment loans Secured/unsecured loans Purchase loan installment contracts The Language of Consumer Loans

Monthly Installment Payments (Principal and Interest) Terms of Installment4%6%8%10%12%14%16%18%20% 1 year (12 months) years (24 months) years (36 months) years (48 months) years (60 months) Monthly Installment Payment (Principal and Interest) Required to Repay $1,000* *To illustrate, assume you want to know how much the monthly payment would be to finance a $9,000 loan at 10% for 3 years. To repay $1,000, the figure is $32.27, multiply by 9 (for $9,000) to determine that $ is required for 36 months of payments. When using amounts greater or less than $1,000, convert using decimals. For example, a loan of $950 at 10 percent for 3 years would be calculated as follows: $32.27 x 0.95 = $30.66.

Sources of Consumer Credit Parents and family members Commercial bank Credit union Life insurance company Savings and loan association Finance company Retailers Cash advances

Truth In Lending Rights The Truth In Lending Act requires creditors to provide you with accurate and complete credit costs and terms. APR Creditors must disclose credit terms and information...  In a clear and conspicuous manner  In a form you can keep

Calculating Finance Charges and APR Simple-interest method Discount method APR CALCULATIONS FOR SINGLE- PAYMENT LOANS:

Calculating Finance Charges and APR Simple-interest method Add-on method Discount method APR CALCULATIONS FOR INSTALLMENT LOANS:

Formula 7.3

Dealing With Over-indebtedness TEN SIGNS OF OVER-INDEBTNESS: 1.Exceeding debt/credit limit. 2.Running out of money. 3.Paying only the minimum due. 4.Requesting new cards and increases in credit limits. 5.Paying late or skipping payments. 6.Not knowing how much you owe. 7.Taking add-on loans. 8.Using debt consolidation. 9.Receiving notice of repossession or foreclosure. 10.Experiencing garnishment.

Dealing With Over-indebtedness Federal law regulates debt collection Bankruptcy as last resort Chapter 13 (reorganization) Chapter 7 (liquidation)

History of Bankruptcies Since 1980

Fair Debt Collection Practices Act Can’t be abusive or threaten Can’t call you at work if you say no Can’t tell boss and friends Can’t call you at odd hours Must follow set procedures The act does not apply to creditors that try and collect the debt themselves Collection agencies...

Impact of Divorce on Credit Pay attention to accounts held jointly Ask creditors to close joint accounts Remember, creditors can legally collect from either party Get updated copy of credit report

Alternative Lenders Pawnshop Rent-to-own program Check cashers Rapid refund services

Manage Over-indebtedness 1. Determine what is owed. 2. Focus budget on debt reduction. 3. Contact creditors. 4. Take on no new credit. 5. Refinance. 6. Find good help. 7. Avoid bad help.

Manage Student Loan Debt 1. Choose most advantageous repayment pattern allowed. 2. Consolidate student loans. 3. Pay electronically. 4. Be punctual with repayments. 5. Refinance with second mortgage loan.