Section 6.2 Notes

Can you afford a loan?  First way to tell  Second way to tell

Debt to Income Ratio  Net Income  Debt to Income Ratio

Debt to Income Ratio  Your monthly net income is $1,200. Your monthly debts include your student loan payment and a gas credit card, and they total $180. What is your debt payments to income ratio?

The Cost of Credit  If you are thinking of getting a loan…  Two key factors to consider..

Finance Charge and APR  The finance charge is the total dollar amount you pay to use credit.  The finance charge is calculated using the APR which is…

Tackling the Trade Offs  Term vs Interest Costs APRTermMonthly Payment Finance Charges Total Cost Creditor A14%3 Years$205.07$1,382.52$7, Creditor B14%4 Years$163.96$ $7,870.08

Lender Risk vs Interest Rate  The lender’s goal is to reduce their risk or make sure you pay back the loan  Options  Variable Interest Rate Loans

Lender Risk vs Interest Rate  Secured Loan  Up Front Cash

Lender Risk vs Interest Rate  Shorter Term

Calculating the Cost of Credit  Simple Interest Loans  The interest computed only on the principal or the amount of money that you borrow.  Based on three factors

 Janelle’s cousin agreed to lend her $1000 to purchase a used laptop computer. She has agreed to charge only 5% simple interest, and Janelle has agreed to pay the loan back at the end of one year. How much interest will she pay for the year?  Formula: Principal x Interest Rate X Term Calculating the Cost of Credit

 Your just bought a used car for $3,500 from your aunt. She agreed to let you make payments for 3 years with simple interest at 6%. How much interest will you pay?  Principal x Interest Rate x Term Calculating the Cost of Credit

 Simple Interest on Declining Balance  When a simple interest loan is paid back in more than one payment, the method of computing interest is known as the declining balance method.

 Add-On Interest  Interest is calculated on the full amount of the original principal, no matter how often you make payments. Calculating the Cost of Credit

 Cost of Credit and Expected Inflation Calculating the Cost of Credit

 Minimum Monthly Payment Trap Calculating the Cost of Credit

 Minimum Monthly Payment Trap Calculating the Cost of Credit

The Five C’s of Credit  Character: Will You Repay the Loan?  Capacity: Can You Repay the Loan?

 Capital: What are your Assets and Net Worth?  Collateral: What if you do not repay? The Five C’s of Credit

 Credit History: What is your credit history?  Do you pay your bills on time?  Have you ever filed for bankruptcy?  Credit Rating The Five C’s of Credit

Assignment  6.2 Assessment  Numbers 1, 2, 3, 4, 5  Save as Initials 6.2 Assessment and Upload