Financial Planning Week 6- Types of Credit YES

What are the main considerations when borrowing money?

• Interest rates

• borrower responsibilities

• long-term impact on financial health

Name four common borrowing methods.

Student loans, lines of credit, credit cards, payday loans.

Why is understanding credit types important?

Helps make responsible borrowing decisions and protects long-term financial stability.

How can borrowing affect your future credit?

• Regular payments improve credit

• missed payments harm credit

• high debt can limit future borrowing

Difference in repayment schedules: installment vs demand loans?

• Instalment: fixed schedule

• Demand: flexible/variable, can be called anytime

Typical interest on credit cards if not paid in full?

~20–25% annually.

What is overdraft protection?

• Allows withdrawal beyond account balance

• prevents bounced checks

• interest/fees apply if overdrawn

Eligibility for Canada Student Loan Program?

Canadian citizens, permanent residents, financially needy students.

Interest rates for federal and provincial portions?

Federal: 0%; Provincial (Ontario): ~5.45%.

When does repayment start for student loans?

6 months after graduation or dropping below full-time status.

What is the Repayment Assistance Program (RAP)?

Reduces payments based on income.

How do student loans impact credit?

• On-time payments improve credit

• payoff can temporarily lower credit score

Typical secured & unsecured line interest (Canada)?

• Secured: Prime 4.45% + 0.5–1.5% → ~5.95%.

• Unsecured: Prime 4.45% + 2–6% → 6.45–10.45%.

How are payments calculated for lines of credit?

Usually interest-only minimum payments (~0.45–0.8% of principal per month).

Difference between fixed and variable interest rates?

• Fixed: stable (~7–9% annually)

• Variable: changes with prime.

How is interest usually calculated?

On outstanding principal; for secured loans may allow interest-only payments.

Why should students/young professionals learn about credit?

• Helps understand types

• interest

• budgeting

• responsible borrowing → long-term financial stability

How does proper borrowing support long-term goals?

• Aligns debt with financial goals

• avoids pitfalls

• improves credit and financial security

What is a bank-issued credit card?

A widely accepted credit card issued by a bank that allows purchases almost anywhere and often includes rewards such as cash back or travel points.

What is a retail (store) credit card?

A store-specific credit card that can only be used within a particular retail chain and usually has higher interest rates.

What is a student loan?

A government or private loan designed to help students pay for post-secondary education

What is a credit card cash advance?

• Allows a credit cardholder to withdraw cash against their credit limit

• with higher interest rates

• no grace period

What is a secured line of credit & examples?

• A line of credit backed by collateral (such as a home or assets) that offers lower interest rates and higher borrowing limits.

• Ex. Home equity line of credit (HELOC) or business equipment loan.

What is an unsecured line of credit?

• A line of credit not backed by collateral

• usually higher interest rates and borrowing limits

• based on creditworthiness

What is a HELOC?

A Home Equity Line of Credit secured by a homeowner’s property that allows flexible borrowing against available home equity.

What are the pros and cons of installment loans?

Pros:

• Structured repayment

• predictable budgeting

• builds credit

• generally lower interest

Cons:

• Less flexible in emergencies

• missed payments harm credit score

What are the pros and cons of demand loans?

• pros: Flexible access to funds, fast borrowing

• cons: Risk of sudden repayment, higher interest

What are the pros and cons of bank-issued credit cards?

• pros: Widely accepted, rewards (cash back/travel), builds credit

• cons: High interest if balance not paid in full, overspending risk, minimum payments can prolong debt

What are the pros and cons of retail credit cards?

• pros: Store-specific rewards, easier approval

• cons: Very high interest (~25%+), limited use, can encourage overspending

What are the pros and cons of credit card cash advances?

• pros: Immediate access to cash in emergencies

• cons: High interest, no grace period, transaction/ATM fees, expensive borrowing option

What are the pros and cons of overdraft protection?

• pros: Prevents bounced checks

• cons: Short-term solution, higher fees/interest than normal loans, not suitable for long-term borrowing

What are the pros and cons of Canada Student Loans?

• Pros: Low/0% interest, repayment assistance programs, access to higher education, builds credit with on-time payments

• Cons: Long-term debt, repayment begins after school, can affect future borrowing ability

What are the pros and cons of secured lines of credit?

• pros: Lower interest, higher borrowing limit, easier approval

• cons: Collateral at risk, appraisal/legal fees, longer approval process

What are the pros and cons of unsecured lines of credit?

• pros: No collateral risk, flexible usage, faster approval

• cons: Higher interest, lower limit, strong credit needed

What are the pros and cons of HELOCs (Home Equity Line of Credit)?

Pros:

• Low interest (compared to unsecured credit)

• flexible access

• interest may be deductible if used for investment/business purposes

Cons/risk:

• Home at risk if unable to repay

• interest rate can fluctuate

• long-term variable debt

What is a payday loan?

• Short-term

• high-interest loan

• due on the borrower’s next payday

Why can payday loans lead to a cycle of debt?

High fees and interest combined with a short repayment period often force borrowers to re-borrow.

Typical characteristics of payday loans?

• Short-term

• extremely high interest (400% average APR)

• additional fees

• easy access

• high financial risk

Pros & cons of payday loans?

• Pros: Fast access to cash, easy approval, minimal credit check.

• Cons: Extremely high interest and fees, short repayment period, high risk of debt cycle, can damage credit if missed.

How does a payday loan affect credit?

• On-time repayment may have minimal positive effect

• missed payments can severely harm credit score

What is an installment loan and give examples?

• A loan where a fixed amount is borrowed and repaid in scheduled payments over months or years.

• Examples: personal loans, auto loans, student loans, mortgages.

What is a demand loan and give examples?

• A demand loan is a loan where the lender can request repayment at any time, with variable payments.

• Examples: personal lines of credit, family loans.

Overdraft protection:

Prevents bounced checks; short-term, higher fees

HELOC:

Home equity line of credit; flexible borrowing; interest-only payments possible

Why debt consolidation is useful:

• Combines high-interest debts into lower-interest loan

• reduces monthly payments