1. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-1 Objectives Provide a background on personal loans Outline the types of interest rates that are charged on personal loans Describe home equity loans Discuss car loans

2. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-2 Objectives (cont’d) Explain how to decide between financing the purchase of a car and leasing a car Describe the key features of student loans

3. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-3 Background on Personal Loans Usually obtained to finance a large purchase Has a specific repayment schedule Sources of loans  Commercial banks, savings institutions, finance companies, credit unions, some automobile manufacturers, friends, or family members

4. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-4 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

5. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-5 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

6. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-6 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 Payday loan: a short-term loan provided in advance of a paycheck  Cosigning is sometimes required if credit history is weak

7. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-7

8. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-8 Financial Planning Online: Loan Request Online Go to: http://www.lendingtree.comhttp://www.lendingtree.com This Web site provides a set of questions that you can answer to specify the type of loan that you desire. You will then receive up to four loan offers from various financial institutions within the next business day

9. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-9 Background on Personal Loans (cont’d) Focus on Ethics: Predatory Lending  Beware of illegal lending practices Lender charging high loan fees Lender provides home equity loan with the expectation of default so he can take ownership Lender ties other products to loan approval Lender includes balloon payment at end of loan Loan agreement includes confusing information  Shop around for best loan terms

10. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-10 Interest Rates on Personal Loans Annual percentage rate (APR): a rate that measures the finance expenses (including interest and other expenses) on a loan on an annualized basis Simple interest: interest on a loan computed as a percentage of the existing loan amount Add-on interest: a method of determining the monthly payment on a loan

11. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-11 Interest Rates on Personal Loans (cont’d)

12. Copyright © 2007 Pearson Addison-Wesley. 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  The longer the maturity, the lower the payment

13. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-13

14. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-14 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

15. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-15 Home Equity Loan (cont’d) Interest rate  Typically variable  Rate is usually tied to an interest rate index and adjusted periodically  Interest on most home equity loans is tax deductible

16. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-16 Car Loans Selecting the car—things to consider  Personal preferences  Price  Condition  Insurance  Resale value  Repair expenses  Financing rate  Revised car loan contracts

17. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-17 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

18. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-18 Car Loans (cont’d) Negotiating the price  Some dealers negotiate and some do not  Sticker price is manufacturer’s suggested retail price (MSRP)  Negotiating by phone Call several dealers  Trade-in tactics Attempt to negotiate price on new car first

19. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-19 Car Loans (cont’d)  No-haggle dealers Make sure price is not higher than other dealers  The value of information Use consumer magazines or Web sites  Purchasing a car online Not as efficient as buying an airline ticket or a book  Financing decisions Estimate dollar amount of monthly payment you can afford before shopping

20. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-20 Financial Planning Online: Trade-In and Retail Value of Used Cars Go to: http://www.kbb.comhttp://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

21. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-21 Financial Planning Online: Car Loan Interest Rate Quotation Go to: http://www.bankrate.com/brm/rate/ auto_home.asp?link=8http://www.bankrate.com/brm/rate/ auto_home.asp?link=8 Click on: “Find the average rates in your city,” then proceed through steps to obtain average rates in your area This Web site provides a car loan interest rate quotation based on term of the loan and whether you wish to purchase a new or used car delineated by city and state

22. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-22 Car Loans (cont’d)

23. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-23 Car Loans (cont’d)

24. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-24 Financial Planning Online: Prevailing Car Loan Interest Rates Go to: http://biz.yahoo.com/b/r/a.htmlhttp://biz.yahoo.com/b/r/a.html This Web site provides average car loan interest rates across the United States and in various states, which provide a useful benchmark for you to consider before obtaining a car loan

25. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-25 Financial Planning Online: What Is the Optimal Loan Maturity? Go to: http://www.bankrate.com/brm/ auto-loan-calculator.asphttp://www.bankrate.com/brm/ auto-loan-calculator.asp This Web site provides a comparison of what your car loan payments will be depending on whether you obtain a loan with relatively short maturity or a loan with a longer term to maturity.

26. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-26 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

27. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-27 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

28. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-28 Financial Planning Online: Should You Lease or Buy? Go to: http://www.bloomberg.com/ analysis/calculators/leasebuy.htmlhttp://www.bloomberg.com/ analysis/calculators/leasebuy.html This Web site provides a comparison of the cost of leasing versus purchasing a car.

29. Exhibit 9.6 Stephanie’s Comparison of the Cost of Purchasing versus Leasing

30. Exhibit 9.6 Stephanie’s Comparison of the Cost of Purchasing versus Leasing (cont'd)

31. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-31 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

32. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-32 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?

33. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-33 Integrating the Key Concepts