Presentation on theme: "Lesson 8-2 Long-Term Debt Repayment -Discuss long-term debt options for the purchase of high-priced items -Explain the purpose of a debt repayment plan."— Presentation transcript:
Lesson 8-2 Long-Term Debt Repayment -Discuss long-term debt options for the purchase of high-priced items -Explain the purpose of a debt repayment plan.
Long-Term Debt Options Many high-priced items that have an extended life can be financed with long-term debt. Long-term debt is a loan that is payable over a period longer than a year. – Examples, car loans, house and land mortgages, loans to purchase small businesses, equipment, or livestock. Amortization is the process of dividing up your debt obligation, plus interest, into equal monthly payments over a set period of time.
Buying a Car A car loan is set up as an installment loan, typically with monthly payments. – With an installment loan, you will make regular payments for a set period of time. – Buyer usually makes a down payment, which is a cash deposit toward the purchase price. – If you have an existing car, you may use it as a trade-in by applying its value to the down payment. Other buying costs include the title fee, the annual licensing fee, and sales tax.
Buying a Car Budget ahead of time to know how much you can afford to pay a month towards a loan. – Remember to factor in the costs of insurance, gasoline, and maintenance. Before buying a car, you can get a preapproved loan, a loan for which a maximum amount is established and approved in advance. Getting a preapproved loan allows the consumer that best negotiating position. Most financial institutions offer loans for 36, 48, 60, or 72 months. You can also consider car dealer financing options.
Buying a car An option to buying is to lease a car. A car lease allows you to use the car for a set period of time. You make a monthly lease payment, but do not own the car. Lease payments are usually cheaper than loan payments. You will be limited to a certain number of miles per year and will have an options to buy at the end of the lease period. You are responsible for general maintenance but not for major repairs. Refinancing a loan involves paying off the old loan with a new loan that usually has better terms, such as a lower interest rate, which will save you money.
Buying a House Someday you may want to consider buying a home. In most cases a house goes up in value or appreciates. Market value is the highest price that property will bring on the open market. As your house is appreciating, you are also paying down the debt, building equity in your property and gaining wealth. – Equity is the difference in the property’s value and what you owe on it. Tax advantages – can deduct interest paid and property tax paid.
Buying a House Buying a house generally involves a large down payment – usually 10 to 20 percent of the total purchase price. A mortgage is used to finance the balance of you purchase. A mortgage is a long-term debt agreement used to purchase real estate. The property is used as collateral. A conventional loan is where you make a large down payment and pay the balance in equal monthly payments for up to 30 years. An FHA loan is a government-sponsored loan that allows for smaller down payment but requires you to pay a monthly mortgage insurance premium as well as the principal and interest.
Buying a House To qualify for a mortgage loan to buy a house, you will need a good credit score and a good down payment. A fixed rate mortgage will have a set interest rate for the full term of the loan. Adjustable rate mortgage (ARM), the interest rate changes in response to the movement of interest rates in the economy.
Buying or Starting a Business A large down payment will also be required for a business startup. Need good credit and a solid business plan. Lender will also need projected revenues and expenses (a budget for the business).
Debt Repayment Plan A debt repayment plan is a strategy for paying off debt in a way that reduces the total interest paid. Paying a little extra each month will bring down your debt much faster. Focus first on the debt with the highest interest rate.
Student Loan Debt Student loans are a type of deferred-payment loan because you are able to postpone making payments on it until you have completed your education. – Subsidized student loans are backed by the government and will not accrue interest until you graduate and start making payments – Unsubsidized student loans will start accruing interest from the time the loan is taken out. Following graduation, you will be allowed to consolidate your student loans, which means that you can get a new student loan that pays off all the existing student loans. The new loan will have a fixed interest rate and your payment will be lower than not consolidating. Loan forgiveness programs are also available to pay back some of your loans if you work in providing a public service such as the Job Corps or a job in education.
Mortgage Debt The shorter term mortgages will generally have a lower interest rate but higher monthly payments. Some loans will start with low monthly payments but then have a balloon payment, which is a large lump-sum payment that must be paid at a set time. The balloon payment is usually the last payment. If you can’t make the balloon payment, you may refinance the loan.
Lease or Rent to Own Under a rent-to-own agreement, a portion of the renter’s monthly payment is applied toward the purchase price of the rented item. The purchase price is locked in. If the renter elects to buy the property at the end of the lease agreement, they have already made a portion or all of the down payment. Rent-to-own agreements can also be used to buy personal property, such as furniture or electronics.
Prepayment Penalty Some types of loans may have penalties for early repayment. A prepayment penalty is a fee charged if you repay a loan before the agreed-upon time. The penalty ensures that the lender recoups loan origination costs. Paying off a debt early still may be a wise choice, even with a prepayment penalty.
Assignment Answer questions 1-19 on pg. 265. This is the last week for your Budget Challenge – Make sure to complete everything before the weekend break.