chapter 9 personal loans. copyright ©2014 pearson education, inc. all rights reserved.9-2 chapter...

Chapter 9

Personal Loans

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


Chapter Objectives (cont’d)

• Describe the key features of student loans

• Describe home equity loans

• Describe payday loans


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


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



• 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



– 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



– 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


Financial Planning Online

• Go to www.helpwithmybank.gov/faqs/

loan_general.html

• This site provides background information on personal loans.


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


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


Interest Rates on Personal Loans (cont’d)


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


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



• Go to autos.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



• Go to 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.



• Go to 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



• 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



• 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



• Go to finance.yahoo.com/rates/query?t=a

• This Web site provides average car loan interest rates across the United States and in various states.


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


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



• Go to autos.aol.com/calculators/car-lease-calculator/

• This Web site provides a comparison of the cost of leasing versus purchasing a car.


Exhibit 9.6 Stephanie Spratt’s Comparison of the Cost of Purchasing Versus Leasing (cont’d)


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


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


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


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



• Go to www.federalreserve.gov/Pubs/equity/equity_english.htm

• This Web site provides more information on home equity loans.


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


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?

chapter 9 personal loans. copyright ©2014 pearson education, inc. all rights reserved.9-2 chapter...

Documents

loan slide

personal loans slide

pearson education

existing loan

payday loans slide

personal loans contd

car loans

rate slide