1. Chapter 9 Personal Loans

2. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-2 Chapter Objectives Introduce personal loans Outline the types of interest rates that are charged on personal loans Discuss car loans Explain how to decide between financing the purchase of a car and leasing a car

3. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-3 Chapter Objectives (cont’d) Describe the key features of student loans Describe home equity loans Describe payday loans

4. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-4 Background on Personal Loans Usually obtained to finance a large purchase Sources of personal loans –Financial institutions Commercial banks, savings institutions, credit unions and finance companies –Family members or friends Loan agreement should be in writing and signed by all parties

5. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-5 Background on Personal Loans (cont’d) Determining whether a loan is sensible –Periodic payments will be required over time –You are sacrificing future earnings –Avoid a loan if your source of income to repay it is questionable

6. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-6 Background on Personal Loans (cont’d) The personal loan process –Application process Personal balance sheet Personal cash flow statement –Loan contract: a contract that specifies the terms of a loan, as agreed to by the borrower and the lender Amount of the loan Interest rate

7. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-7 Background on Personal Loans (cont’d) –Loan repayment schedule Amortize: to repay the principal of a loan through a series of equal payments Each payment includes part of the principal and part of the interest –Maturity: the life or duration of the loan Longer maturity equals lower payments, but more interest is paid over the life of the loan

8. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-8 Background on Personal Loans (cont’d) –Collateral: assets of a borrower that back a secured loan in the event that the borrower defaults Secured loan: a loan that is backed or secured by collateral Unsecured loan: a loan that is not backed by collateral –Cosigning is sometimes required if credit history is weak

9. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-9

10. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-10 Financial Planning Online Go to www.helpwithmybank.gov/faqs/www.helpwithmybank.gov/faqs/ loan_general.html This site provides background information on personal loans.

11. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-11 Interest Rates on Personal Loans Annual percentage rate (APR): a rate that measures the finance expenses (including interest and other expenses) on a loan annually –Standard rate required to be disclosed by lenders –Provides comparison between lenders –Result of Truth-in-Lending Act of 1969

12. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-12 Interest Rates on Personal Loans (cont’d) Simple interest: interest on a loan computed as a percentage of the existing loan amount (or principal) –Size of payment depends on size of loan, interest rate and maturity –The higher the interest rate, the higher the payment Add-on interest: a method of determining the monthly payment on a loan

13. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-13 Interest Rates on Personal Loans (cont’d)

14. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-14

15. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-15 Car Loans How much money to spend on a car? –Consider how your decision affects your personal budget –Adding credit card debt to car loan debt –The no-debt solution Only buy what you can pay cash for –The limited-debt solution Short term loan

16. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-16 Car Loans (cont’d) Selecting the car—things to consider –Personal preferences –Price –Condition –Insurance –Resale value (www.edmunds.com) –Repair expenses –Financing rate –Revised car loan contracts

17. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-17 Financial Planning Online Go to autos.yahoo.comautos.yahoo.com This Web site provides estimates of what you should pay for any new car, based on the car’s features and options that you specify

18. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-18 Financial Planning Online Go to www.kbb.com/www.kbb.com/ This Web site provides trade-in and retail values for a used car, based on the condition of the car, its age, and other characteristics that you specify.

19. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-19 Financial Planning Online Go to www.ftc.gov/bcp/edu/pubs/consumer/autos /aut05.shtm www.ftc.gov/bcp/edu/pubs/consumer/autos /aut05.shtm This Web site provides questions you should ask when you are offered unusually low financing rates

20. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-20 Car Loans (cont’d)

21. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-21 Car Loans (cont’d) Negotiating the price –Negotiating by phone may be beneficial –Trade-in tactics can be misleading –No-haggle dealers can save time and stress –Information is valuable–shop around –Purchasing a car online is possible, but not yet a streamlined process

22. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-22 Car Loans (cont’d) Financing decisions –Estimate the dollar amount of the monthly payment before you shop –Longer financing periods (up to seven years) provide lower payments –Car may be worthless by the time you pay it off

23. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-23 Financial Planning Online Go to finance.yahoo.com/rates/query?t=afinance.yahoo.com/rates/query?t=a This Web site provides average car loan interest rates across the United States and in various states.

24. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-24 Car Loans (cont’d)

25. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-25 Purchase versus Lease Decision Leasing is a popular alternative to buying a car Advantages of leasing –Lower down payment –Just return the car at the end of the lease period Decision is highly dependent on the estimated market value of the car at the end of the lease period

26. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-26 Purchase versus Lease Decision (cont’d) Disadvantages of leasing –You build no equity in the car –You are still responsible for maintenance and damages –Additional charges may be imposed Too many miles Ending the lease before the specified period

27. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-27 Financial Planning Online Go to autos.aol.com/calculators/car-lease- calculator/autos.aol.com/calculators/car-lease- calculator/ This Web site provides a comparison of the cost of leasing versus purchasing a car.

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29. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-29 Exhibit 9.6 Stephanie Spratt’s Comparison of the Cost of Purchasing Versus Leasing (cont’d)

30. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-30 Student Loans Student loan: a loan provided to finance part of the expenses a student incurs while pursuing a degree Loan may be provided to either the student or the student’s parents Repayment typically deferred until student is out of school Interest may be tax deductible

31. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-31 Home Equity Loan Home equity loan: a loan where the equity in a home serves as collateral for the loan Equity of a home: the market value of a home minus the debt owed on the home Credit limit on a home equity loan –Limit based on equity invested –Financial institutions usually loan up to 80% of the equity in a home

32. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-32 Home Equity Loan (cont’d) Impact of the economy on the credit limit –As economic conditions change, so does the value of a home –Market values of homes may decline substantially, leaving no equity in the home

33. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-33 Home Equity Loan (cont’d) Interest rate –Typically variable –Rate is usually tied to an interest rate index and adjusted periodically Interest paid on a home equity loan up to $100,000 is tax-deductible

34. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-34 Financial Planning Online Go to www.federalreserve.gov/Pubs/equity/equity _english.htm www.federalreserve.gov/Pubs/equity/equity _english.htm This Web site provides more information on home equity loans.

35. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-35 Payday Loans Payday loan: a short-term loan provided in advance of a paycheck Reasons to avoid payday loans –Using your next paycheck to cover the loan may make you unable to cover your normal purchases –Cost of financing is outrageous Alternatives to payday loans –Friends, family members, credit cards

36. Copyright ©2014 Pearson Education, Inc. All rights reserved.9-36 How Personal Loans Fit within Your Financial Plan Key personal loan decisions for your financial plan are: –How much money can you afford to borrow on a personal loan? –If you obtain a personal loan, should you pay it off early?

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