Ch4. Credit & Loans

Church leaders, while generally discouraging debt, have indicated that borrowing money may be necessary for some things(providing for a fam). Which debt is not an option?

Starting a family

Credit

Contractual agreement: A borrower receives something of value now & agrees to repay the lender @ some future date, generally w/ interest.

Also refers to the borrowing capacity of an individual or company

Debt

Something owned to someone else

5 C’s of credit lenders use to judge loan applicants

1. Character: Amount og integrity u demonstrate.

2. Capital: The worth of all ur assets.

3. Capacity: Ur ability to repay ur debt from ur fam income.

4. Collateral: An asset that can be pledged against a loan.

5. Conditions: Economic state of the nation/community at the time of a loan request.

Character

The amount of integrity u demonstrate

Capital

The worth of all ur assets

Capacity

Ur ability to repay debt from ur fam income

Collateral

An asset that can be pledged against a loan

Conditions

Economic state of the nation/community at the time of a loan request

Credit Score

3-diget # that’s used by banks, insurance companies, other financial institutions to determine how likely it is that u will be creditworthy & pay ur debts on time.

Helps determine what interest rate companies will charge

Credit bureaus

private companies that collect & report ur financial info from creditors, public records, & various institutions.

Credit reports

Files of info that credit bureaus complete about specific ppl.

Almost half of all credit reports contain incorrect or obsolete info

True

Credit Evaluation

Process of turning info into ur credit report into a 3-diget # to determine whether or not u deserve to be given credit.

The higher your credit score → the lower the interest rate you will pay

True

FICO Score

The most common type of credit score.

• range from 300-850

• The higher the score, the better

620 credit score

Poor

620-679 credit score

Fair

680-719 credit score

Good

720+ credit score

Excelent

Components of credit score from most to least heavy in evaluating score

1. Payment record 35%

2. Total amount you owe 30%

3. Length of your credit history 15%

4. application history 10%

5. Credit mix 10%

You should review ur credit score ____ & credit report ____.

monthly; annually

How many credit cards should be actively used at a time?

2-3

Spouses have different credit scores but should be account holders & have access to all info.

True

Credit cards

Form of open credit thay allows u to borrow $ up to a limit w/o collateral; W/ expectation that u will pay back the $ @ a specific interest rate & w/ specific terms.

Grace period

Period of time b/t payment due & penalties

Consider these when evaluating credit cards:

• Annual fee (range: 0-$95)

• Perks (flyer miles, cash back)

• Grace period

• APR (interest rate charged in outstanding balances expressed as an annual percentage rate)

• Method of determining interest rates (discount rate plus 5% points,)

• Minimum payment required

Balance

Total amount owed on a credit card @ a specific time.

If have a balance on card: select a credit card w/ lowest possible annual % rate.

Credit limit

Available credit given to a specific account holder.

Benefits of appropriate card usage:

• Emergencies- Don’t have cash and need to pay for something.

• Reservations- Guarantee hotel, rental car…

• Convenience- Can buy on phone/internet. make buying things easy. give record or spendings

• Cash flow & timing- Can buy good deals/sales of don’t have money now.

• Free services- Offers rewards

• Credit score- Can build strong credit score

Drawbacks on credit cards

• Increased spending- On avg, ppl spend more w/ credit cards than w/ cash (sometimes 100% more)

• Losing track of spending- Interest charges 8%-25%. Take into account compound periods, annual fees, other fees.

• Obligation on future income- As take on debt= more obligated to future income & limits future flexibility

Credit-aolic

Someone who is addicted to credit & financial life is out of control.

Danger signals of credit-aolic & need to get life together:

• Total consumer credit payment over 20% of monthly budget?

• Increase portion of income going to debt repayment?

• Credit cards at/near their limit?

• Always late on 1+ bills?

• Borrowing to pay for things u used to pay for w/ cash?

• Taken out new loan to pay for old loan?

• Net worth decreasing?

• If u lost ur job, would u make it for 3-6 months?

• R creditors threatening to repossess?

Plastic surgery

Cutting up credit card, make it unusable, but still keep account open.

Do this if become credit-aolic.

Don’t cancel account unless it has an annual fee.

Diff b/t credit & debit cards

Debit:

• $ leaves account immediately when use

• must have significant $ in account to use

• can be used at ATM

Credit:

• use loan $

• ur actual $ leaves account weeks a/f make a purchase

Consumer Loans

An amount of $ lent to an individual for personal, fam, or household purposes.

• monitored by gov agencies

• what’s purchased decreases in value & eventually consumed

• expensive w/ high interest rates

Consumer loans are almost always unnecessary.

True

Diff types of consumer loans

• Single-payment loans

• Installment loans

• Secured loans

• Unsecured loans

• fixed-rate loans

• Variable-rate loans

• Convertible loans

Single-Payment Loans (consumer loan)

Short-term lending repaid in one lump sum. May be used to temporarily finance a purchase until payment, long-term financing can be arranged.

Includes interest. Payed at end of specific time (1 year).

AKA: Balloon loans, bridge, or interim loans

Installment Loans (consumer loan)

Loans that r repaid @ regular intervals (monthly).

• each payment includes part payment & interest

• Authorized over length of loan (each payment: most go to principal & less to interest)

Secured Loans (consumer loan)

Uses 1 of ur assets as collateral to guarantee the lending institution will get $ back, even if failed to make payment

• lower interest rates

• risky

Unsecured Loans (consumer loan)

Do not require collateral & r generally offered only to borrowers w/ excellent credit history.

• High interest rates (12%-26%+)

Fixed-Rate Loans (consumer loan)

Maintain same interest rate for duration of loan.

• Majority of consumer loans-most common/used

• Higher interest rates than variable-rate loans bc can lose $ if market interest rates increase.

Variable-rate Loans (consumer loan)

Interest rates adjust at diff intervals over life of loan

• usually have max/cap int.rate on loan & in each year

• int.rate adjust based on index

• usually lower interest rates up front

Convertible Loans (consumer loan)

Interest-rate structure can change.

• EX: max start off w/ variable int.rate & change to fixed.

Loan contract

Document describing what the lender requires of ur fam once ur granted the loan

Truth in Lending Act (federal consumer credit protection act)

Law that requires all lenders provide consumer w/ certain info b/f they sign credit contracts.

• contain 2 imp info relative to cost of credit: (1)total finance charge expressed in dollars, (2)annual % rate of interest (APR).

• states: lenders cannot require u to purchase credit life insurance from them. But can require u have life insurance to insure the payment of ur loan in the event you die.

The Truth in Lending Act requires that u have life insurance to insure the payment of ur loan in the event of ur death.

Student loans

Loans used to pay for higher education & have federally subsidized interest rates

Automobile Loans

Short-term loans: secured by automobile the loan is paying for.

• lower interest rates than unsecured loans.

Payday Loans

Short-term loans of ½ weeks which r secured w/ postdated checks.

• !Avoid like the PLAGUE!

Family Loans

Borrowing & lending b/t fam members

Debt-Reduction Process

1. Recognize & accept u have debt prob

2. Stop incurring debt

3. Make a list of all ur debts

4. Look for many diff ways to reduce debt

5. Organize a repayment or debt-reduction strategy. (like a debt-elimination calendar)

Debt-Elimination Calendar

(Debt elimination strategy)

• pay out al debt payments

• Pay all minimum payments, but focus more on one until it’s payed off

• then using amount of $ previously paid towards that debt to pay off the next most impt debt