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Chapter 4: Going into Debt

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Presentation on theme: "Chapter 4: Going into Debt"— Presentation transcript:

1 Chapter 4: Going into Debt
Section 2: Sources of Loans and Credit

2 Two Credit Sources Banking Institutions Credit Card Companies

3 Types of Financial Institutions
Commercial Banks: checking/saving accts. - Loans to individuals Control the most money; offer the most services Savings and Loan (S&L) Associations: - Savings Institutions primarily provide loans for homes. Savings Banks: Originally served small businesses and homes Originally did not provide Checking

4 Types of Financial Institutions (Cont’d)
Credit Unions: Owned and operated by its members Provides low interest loans to members Good consumer loans, but must join to use Finance Companies: Institution that takes over loans from retailers Usually used with higher risk consumers Consumer Finance Companies Offer sub-prime (High interest) loans to higher risk companies Offer High Rate Credit Cards Use shady business practices

5 Crisis and Change: The 80’s
S&L Banks deregulated Could offer checking accts as well as business loans S&L’s make risky commercial investments Cost tax-payers billions in bailout money

6 Charge Accounts Buy goods from a company and pay later
Regular Charge Account: $500-1,000 Credit limit in which a bill is sent monthly No interest, but bill must be paid immediately Revolving Charge Account: You don’t pay entire monthly bill, interest is added Installment Charge Accounts: Equal payments over a period of time Interest is paid

7 Credit & Debit Credit Debit: Withdrawn from Checking account
Can be used at many different stores Usually charge high interest Debit: Withdrawn from Checking account

8 Finance Charges (The Cost of Credit)
Costs vary from company to company APR: Cost expressed by a yearly percentage

9 Applying For Credit Credit Bureau: Private Business hired by a lending agency Run Credit Check: Income Current Debts Personal life details Ex. How you’ve repaid debts in the past

10 Credit Check Reveals “Credit Rating”
Higher the number, better chance of getting a loan The 4 C’s of credit worthiness 1.Capacity to pay: Employment History 2.Character: Reputation Ex. Trustworthy, criminal history Collateral: What you are worth Capital: Similar to Collateral, it is personal items of value. Example would be your investment accounts. Shows your past ability to save and accumulate Over 700 is Good, below 600 not so good

11 2 types of loans Secured: Backed by collateral
Unsecured: Loan on reputation alone

12 Borrowing Responsibilities
Pay on time If you don’t, fees will be incurred Keep financial records

13 Government Regulation of Credit
Equal Credit Opportunity Act(1974): Credit cannot be denied based on Race, religion, etc. No discrimination bc. You receive govt. benefits Women were the ones being discriminated

14 Usury Laws Law restricting the amount of interest that can be charged for credit Interest Ceilings limit the profit a bank can make Early on, this had adverse effects on the economy

15 The B-Word Bankruptcy: Bankruptcy is not an easy way out
Cant pay debt. Turn everything you own over to creditors Bankruptcy is not an easy way out

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