Economics Unit 5 (Chapter 11) #1

Unbanked

No one in the household has a bank or credit union account

• Approximately 6 million U.S. households (4.5% of population) are unbanked

• People are unbanked for reasons including past account issues, fees, and convenience

• About 50% of Americans cannot come up with $2,000 for an emergency expense

*Alternative Financial System

Includes check cashers, pawn shops, and payday/title lenders

• Alternative lenders charge significantly higher rates than mainstream lenders

*Mainstream Financial System

Includes banks and credit unions

• Mainstream lenders charge significantly lower rates than alternative lenders

Payday Loan

The most popular alternative loan option but should be a last resort

• Military members have special protection with a 36% maximum APR on payday loans

• Typically charge $15 per $100 borrowed (translating to 391% APR)

Check Casher

A business that turns a paper check into immediate cash for a fee

Title Loan

A short-term loan where a borrower uses their vehicle as backing for the debt

Pawn Shop

A business that provides short-term cash loans in exchange for physical personal items

Personal Loan

Can be secured (backed by collateral) or unsecured (signature loans)

Secured Loan

Backed by collateral

Unsecured Loan

(Signature loans) No collateral involved

Installment Loan

Provides a lump sum upfront with fixed monthly payments

Deposit Advance

Are short-term loans repaid when the next electronic deposit is made

• Typically charge $10 per $100 borrowed

Line of Credit

Allows borrowers to draw funds as needed with variable interest rates

• Typically have annual fees of $25-$50

Peer-to-Peer Lending

Connects borrowers and lenders via online platforms

*Credit Cards

Can be both secured and unsecured forms of credit

FAFSA (Free Application for Federal Student Aid)

To determine what types of financial aid you may receive

Federal Direct Loans

Comprise the primary form of student financial aid;

Include subsidized, unsubsidized, PLUS, and consolidation loans

Subsidized Loans

Government pays your interest while you are in school;

Federal subsidized loans have no interest until 6 months after graduation

Unsubsidized Loans

You pay all interest from the day you get the loan

PLUS Loans

Loans for parents or graduate students to cover extra costs

Grace Period

Repayment typically begins within 6 months of completing school

Repayment Plans

Available include standard, graduated, extended, and income-based

Public Service Loan Forgiveness

Available after 120 payments while working for government or nonprofit

Income-Based Repayment

Sets federal student loan payments based on your income and family size

Investment Payback Period =

Total education costs / increase in annual income

• Small decisions like working during the summer can reduce investment (?education) payback period

*3 Factors Affecting College Wealth Accumulation:

Rising costs, more debt, and slower income gains

529 Plan

Offers tax-advantaged college savings with tax-free distributions for qualified expenses

Grants and Scholarships

Grants are typically need-based

Scholarships are typically merit-based