Lecture 8: Assessing, Managing, and Securing Your Credit (Part 3)

Home Equity Line of Credit

A loan in which the equity in a home serves as collateral (i.e., the lender can claim your home if you default).

• Pay monthly interest only.

• Interest is typically variable.

• Pay the principal at a specified maturity date (or at any earlier date).

• Use the borrowed funds for any purpose.

• May also be considered a second mortgage.

Home Equity

The market value of your home minus any outstanding mortgage balance and/or debts held by others that are secured against your property.

Second Mortgage Loan

A secured mortgage loan that is subordinate (i.e., secondary) to another loan.

Prime Rate of Interest

The interest rate a bank charges its best customers.

Potential Issue with a Home Equity Line of Credit

• Borrower may never get around to paying down the principal.

• Interest payments may rise to the point where the borrower cannot afford the interest only payment.

Therefore, it is always important to have a plan for repayment.

Personal Loans

The most common source of financing, in which a loan is made to an individual.

• Can come from…

  • Chartered banks.

  • Finance companies (e.g. Ford Credit Canada).

  • Credit unions.

Loan Contract

A contract that specifies the terms of a loan as agreed to by the borrower and the lender.

• Includes information on the…

  • Amount of the loan.

  • Interest rate as a nominal (APR) rate.

  • Loan repayment schedule.

  • Maturity date.

  • Collateral.

  • Lender’s rights.

Amortize

In which the principal of a loan is repaid through a series of equal payments.

Maturity/Term of a Loan

The life or duration of a loan.

• Longer maturity results in a lower monthly payment and more interest paid over the life of the loan.

• Select a maturity that is as short as possible, allowing yourself sufficient liquidity.

Forms of Security for a Loan

The most common method is simply a promise to repay the debt as per the loan agreement.

• Can also be assets (cash or personal belongings) as collateral.

Collateral for a Loan

The assets of a borrower that back a loan in the event that the borrower defaults.

• A form of security for the lender.

• Lenders prefer assets that are less likely to decrease in value.

• Lender could repossess assets if you do not make loan payments.

Secured Loan

A loan that is backed, or secured, by collateral.

• Typically has more favourable terms.

Unsecured Loan

A loan that is not backed, or secured, by collateral.

Co-Signing

In which a second person legally agrees to be equally responsible for a borrower's debt, acting as a guarantee to the lender that the loan will be repaid.

• Sometimes required if credit history of the borrower is weak.

• Can have significant financial implications for the second person.

• Should be an action of last resort.

Potentially Illegal Lending Practices

• Lender charging high loan fees.

• Lender provides home equity loan with the expectation of default so he can take ownership.

• Lender ties other products to loan approval.

• Lender includes balloon payment at end of loan.

• Loan agreement includes confusing information.

True Cost of Borrowing on Personal Loans

• APR must be converted to an effective interest rate, also known as the effective yield.

• Must also take into account the payment of additional fees (e.g. service charges and appraisal fees for any collateral).

Things to Consider When Purchasing a Car

• Personal Preferences: The car you want may be different than the car you need.

• Price: Consider the cost of insurance, maintenance, and gas.

• Condition: Have a qualified mechanic assess a used car.

• Insurance: Obtain insurance estimates before making a purchase.

• Resale Value: Estimate resale value by looking at today’s resale value of similar cars.

• Repair expenses.

• Financing Rate: Compare financing rates and the purchase price offered among dealers.

Negotiating the Price of a Car

Most dealers will negotiate the manufacturer’s suggested retail price (MSRP).

• Dealer’s invoice price may, or may not, reflect what the dealer actually paid the manufacturer.

• Beware that dealers may have sales incentives and holdbacks offered by the manufacturer.

• Call several dealers to the range of prices.

• Buy near the end of the month (when dealers are aiming to meet their sales quotas).

• Attempt to negotiate price on new car before mentioning that you have a trade-in.

Advantages of Leasing a Car

• Do not need a substantial down payment.

• Return the car at the end of the lease period.

• Lower monthly car payment.

Disadvantages of Leasing a Car

• No equity investment.

• Responsible for maintenance costs and damage.

• Usually has a kilometre limit, and/or other fees.

Student Loan

A loan provided to finance a portion of a student’s expenses while pursuing post-secondary education.

• Set limits on how much a student can borrow each year, based on assessed need.

• Obtained through the federal Canada Student Loans Program.

• Provincial programs can be used to cover the difference.

• For full-time students, loan repayment begins after education is completed. For part-time students, interest payments must be made while studying.

• Interest paid may be tax deductible.

• Must still be paid back if you declare bankruptcy within 7 years of ceasing to be a student.

A poor credit history will appear on your credit report for…

3-10 years.

Bankruptcy filings will remain on your credit report for…

6-7 years.

Consumer Proposal

An offer made by a debtor to his or her creditors to modify his or her payments.

• Last resort before declaring bankruptcy.

• Creditors have up to 45 days to object.

• Proposal can be made in cases where individual debt is less than $250 000, not including your home mortgage.

• Removed from your credit bureau report once the consumer proposal terms have been met.

Insolvent

A person who owes at least $1000 and is unable to pay his or her debts as they come due.

Licensed Insolvency Trustee

A person licensed to administer consumer proposals and bankruptcies and manage assets held in trust.

• Unsecured creditors will not be able to take legal steps to recover their debts from you.

Bankruptcy

Trustee will sell your assets and distribute the money obtained to your creditors on a pro rata basis.

• Certain assets are exempt from bankruptcy.

• Spouse or common-law partner is not affected by your personal bankruptcy as long as he or she is not responsible for your debt.

• Bankruptcy is a last option for overwhelming debt.

Identity Theft

Occurs when an individual uses personal, identifying information unique to you (e.g., SIN, driver’s license number, credit card accounts, bank accounts, name, date of birth) without your permission for their personal gain.

• Goal may be to acquire money or goods or to establish a new identity for criminal purposes.

Identity Theft Tactics: Shoulder Surfing

Occurs in public places where you can be readily seen or heard by someone standing close by.

Identity Theft Tactics: Dumpster Diving

Occurs when an identity thief goes through your trash for discarded items that reveal personal information that can be used for fraudulent purposes.

Identity Theft Tactics: Skimming

Occurs when identity thieves steal your credit card or debit card number by copying the information contained in the magnetic strip on the card.

Identity Theft Tactics: Shimming

A tactic of inserting a device into the slot on an ABM/ATM or card reader that can read the information on an inserted card, allowing identity thieves to create credit card that is close enough to the real card that it may fool some banks or merchants.

Identity Theft Tactics: Pretexting

To trick someone into divulging sensitive personal or financial information

• Occurs when individuals access personal information under false pre-tenses.

Identity Theft Tactics: Phishing

Occurs when pretexting happens online.

Identity Theft Tactics: Pharming

Similar to phishing, but targeted at larger audiences, it directs users to bogus websites to collect their personal information.

Other Identity Theft Tactics

• Abusing Legitimate Access to Records: Co-workers, places you do business, public records.

• Crime rings.

• Violating Your Mailbox: Both incoming and outgoing mail can provide personal information.

How to Protect Yourself from Identity Theft

• Be careful about sharing personal information.

• Be particularly careful about your SIN.

• Talk to your children about identity theft and how to minimize risk.

How to Protect Your Credit Cards from Identity Theft

• Keep track of when credit card bills are supposed to arrive.

• Review credit card and bank statements.

• Check your credit report annually.

How to Protect Your Mail from Identity Theft

• Use a locked mailbox.

• Ensure your mail is forwarded when you move.

• Shred or destroy items with your identifying information.

• Have a trusted neighbour pick up your mail if you are away from home.

How to Protect Your Phone from Identity Theft

Don’t give out personal information unless you have initiated the call or verify that the caller is from a legitimate organization.

How to Protect Your Wallet from Identity Theft

• Carry only essential ID.

• Do not allow copies of your ID to be made unless there is a legitimate need.

How to Protect Yourself Online from Identity Theft

• Protect your computer and mobile devices with passwords.

• Make sure your computer has online security, such as firewalls and virus protection.

• Create unique, hard-to-guess passwords.

If identity theft occurs…

• Report the incident to local police if a theft or crime.

• Report the crime to the Canadian Anti-Fraud Centre if a scam or fraud.

• Review your credit report.

• Advise your bank and credit card companies.

• Report any missing identity documents or cards.

• Have a fraud alert placed on your credit file.

Organizations to Contact In Case of Identity Theft

• National Credit Bureaus.

  • Equifax.

  • TransUnion Canada.

• Governmental Agencies.

  • Office of the Privacy Commissioner of Canada.

  • Competition Bureau.

  • Canadian Anti-Fraud Centre.

  • Financial Consumer Agency of Canada.