borrower beware 1. why borrow? 2 consumer debt for 2012 o average credit card debt per household: o...
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Borrower Beware
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Why Borrow?
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Consumer Debt for 2012O Average credit card debt per household:
O Total credit card debt in America:
O Average student loan debt:
O Total student loan debt:
Source: http://www.investopedia.com/financial-edge/1112/why-credit-card-debt-levels-are-rising.aspx
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Consumer Debt for 2012O Average credit card debt per
household: $15,328
O Total credit card debt in America: $852 billion
O Average student loan debt: $33,005
O Total student loan debt: over $1 trillion
Source: http://www.investopedia.com/financial-edge/1112/why-credit-card-debt-levels-are-rising.aspx
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Where can I get a loan?O BankO Credit UnionO Credit CardO Loan Companies
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How do I qualify for a loan?
OFinancial institutions want to know your credit history and personal information such as: O How much do you owe in debt?O Do you make regular payments on
your existing debt?O What is your income?O What is your net worth?
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What is APR?OThe annual percentage rate (APR) is the actual annual cost of the loan over the term of the loan.
OSince each lender has different loan terms, the federal government requires lenders to disclose the APR.
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How do I compare loans?
Compare the APR.
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Understanding LoansO Secure Loan: Loan is secured with
collateral. (Collateral is a piece of property that can be sold by the lender to recover all or part of a loan.)
O Unsecure Loan: Loan is not secured with collateral. These loans have a higher interest rate since there is no collateral.
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What is a Payday or Title Loans?
O Easy access loans are sometimes called title loans or payday loans. They make it “easy” to get a loan. The high cost is due to the short time period of the loan and to the fee. When the interest rate or fee is calculated over the short time period, the Annual Percentage Rate (APR) will be huge.
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How do payday loans work?
O A borrower signs over a personal check for collateral to get quick cash. The lender, who advertised 15% interest, agrees not to deposit the check until payday.
O Let's say you want to borrow $200 until you get your next paycheck in two weeks.
O Calculate the fee: 15% of $200 is $30.O You write a check to a payday lender for $230 O The $30 fee you pay on the loan calculates to
an Annual Percentage Rate (APR) of 391%.
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Compare Small Loans
Common Small Loan Easy Access LoanLoan Amount $500 $500
Loan Term 12 months 14 days
Interest Rate 7% n/a
Financial Fee none $50*
Annual Percentage Rate
Payment
Total Repayment *1st 14 day fee is $50, if renewed an additional $50 fee is required.
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Compare Small Loans
Common Small Loan Easy Access LoanLoan Amount $500 $500
Loan Term 12 months 14 days
Interest Rate 7% n/a
Financial Fee none $50*
Annual Percentage Rate 7.22% 260.71%
Payment
Total Repayment *1st 14 day fee is $50, if renewed an additional $50 fee is required.
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Compare Small Loans
Common Small Loan Easy Access LoanLoan Amount $500 $500
Loan Term 12 months 14 days
Interest Rate 7% n/a
Financial Fee none $50*
Annual Percentage Rate 7.22% 260.71%
Payment $43.26 per month $550 due in 14 days
Total Repayment *1st 14 day fee is $50, if renewed an additional $50 fee is required.
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Compare Small Loans
Common Small Loan Easy Access LoanLoan Amount $500 $500
Loan Term 12 months 14 days
Interest Rate 7% n/aFinancial Fee none $50*
Annual Percentage Rate 7.22% 260.71%
Payment $43.26 per month $550 due in 14 days
Total Repayment $43.26 x 12 = $519.12 $500 + $50 = $550*1st 14 day fee is $50, if renewed an additional $50 fee is required.
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How do I determine how much I will owe?
O Go to www.bankrate.comO Choose Loan and amortization
calculatorO Enter the following:
O Loan amount: $5,000O Loan term: 2 yearsO Interest rate: 4%O Loan start date: Use today’s date.
Monthly payment: $217.12
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How do I determine how much I will owe?
OWhat is your total repayment?$217.12 x 24 months =
$5210.88OHow much of the total
repayment is interest?$5210.88 - $5000 = $210.88
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What happens if you don’t qualify for 4% interest?O Loan amount: $5,000O Loan term: 2 yearsO Interest rate: 6%, 8%, or 10%O Loan start date: Use today’s
date.
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What happens if you increase the loan term?
O Loan amount: $5,000O Loan term: 3 years or 4 yearsO Interest rate: 4%O Loan start date: Use today’s
date.
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Credit CardsO A credit card purchase is a loan from the
financial institution that issued the card.O Credit card interest rates tend to be higher
than rates for other loans.O Credit card companies may charge significant
fees related to a credit card and its use.O Borrowers who use credit cards for purchases
and who do not pay the full balance when it is due, pay much higher costs for their purchases because interest is charged monthly.
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How do I determine how much I will owe?
O Go to www.bankrate.comO Choose Credit card payoff calculatorO Enter the following:
O Credit card balance: $5,000O Credit card interest rate: 17%O Payment amount per month: $300
Number of months to payoff: 20 months
20 x $300 = $6000
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What happens if you can’t pay $300 per month?
O Credit card balance: $5,000O Credit card interest rate:
17%O Payment amount per month:
$200 or $100
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What happens if you change the interest rate?
O Credit card balance: $5,000O Credit card interest rate: 9%
or 14%O Payment amount per month:
$300
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What are other fees that credit cards companies
charge that are not calculated with the APR?O A credit card company may charge
an annual fee.O A credit card company may charge a
fee for each transaction.O A credit card company will charge a
late fee if the payment is not received by the due date.
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ActivityO Use the online calculator to answer
questions 17 – 21 on Activity 8.7-1.
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What have you learned?
OWhat questions do I need to ask when getting a loan?
OWhat advice would you give a
friend who is about to get a credit card?
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What financial responsibilities are tied to borrowing?
O If you borrow money, you are responsible for paying it back.
O If you borrow money, you are responsible for making your payments on time.
O It is not responsible to borrow money to purchase things you want. Borrow only if it is a necessity.
O If you have to get a loan or you have to use a credit card for emergencies, pay off your debt quickly to reduce the paid interest.