Credit and Debt. The basic idea You want money (say to buy a house) You go to the bank to borrow some They agree to give you money, but only if you pay.

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Presentation transcript:

Credit and Debt

The basic idea You want money (say to buy a house) You go to the bank to borrow some They agree to give you money, but only if you pay back more than you borrowed The extra amount is called interest

Interest A percentage of the money you have borrowed which is added to your debt each year. Example: You borrow $100,000 at a 5% annual interest rate. If you pay nothing back for a year, you will owe $105,000.

Interest Rates A mortgage (loan to buy a house) will have interest rates of between 4% and 7% A credit card will have a rate as high as 20% The more risk the bank is taking in giving the money, the higher the interest rate will be. Any rate above 60% per year is illegal in Canada

Example 1 Someone borrows $2000 on their credit card at an interest rate of 20% After one year they owe $2400 After two years they owe $2880 After three years they owe $3456 After four years they owe $4147

Example 2 Someone takes out a total of $40,000 in student loans with an interest rate of 5.5%. They are able to pay off $10,000 each year. First year: $42,200 – $10,000 = $32,200 debt Second year:$33,971 - $10,000 = $23,971 debt Third year: $25,289 - $10,000 = $15,289 debt Forth year: $16,130 - $10,000 = $ 6,130 debt

Assignment On a lined piece of paper list the pros, cons and things to consider for someone going into debt in each scenario: 1. An 18 year old to pay for college 2. A newly married couple to buy household appliances 3. Someone buying a home to use as a rental property 4. Someone buying their first car