Loans

Sources of Consumer Credit

Inexpensive Loans

  • Parents or Family members (Best form)


Borrowing (Bank)


Loan for Finance Education

  • US department of education


Medium-Priced Loans

  • Commercial banks, savings and loan associations, and credit unions. (higher rates)

  • No collateral


Expensive Loans

  • Finance and checking companies

  • Retailers such as appliance and car dealers

  • Bank credit card and cash advances


Truth in Lending Law: The federal law required creditors to display (APR)

Finance Charge: Total dollar amount you pay to use credit

  • Interest cost

  • Service Charges

  • Insurance Premiums



Trade off to loans

Term vs interest cost

  • Longer loans, lower payment, but more interest

  • Larger payment amounts but less interest


Lender Risk vs Interest Rate

Reduce the lender’s risk and the interest rate charged to you.

  • Accept a variable interest rate (Better when planning to pay it down fast)

  • Provide collateral to secure the loan

  • Make a large payment up front

  • Having a shorter loan


Open-Ended Credit

Adjusted Balance Method

  • Charges are calculated after payment made in the billing period has been subtracted

  • When you make the payment in the billing period, it doesn’t matter


Average Daily Balance

  • When you make the payment in the billing grace period, it does matter (Could include new purchases or not include them) (If new purchases are included, you could be charged interest right away)

Creditors

  • Adjust your balance for each day in the billing period

  • Divide this total by the number of days in the billing period

  • Multiply this average by the monthly interest rate


Previous Balance Method

  • Method of finance charges that gives no credit for payments during a pay period.



Inflation: Borrowers and lenders are concerned about dollar purchasing power rather than the actual credit used.

  • Higher inflation = higher interest rates

  • Interest paid on consumer credit is not tax deductible


Avoid Minimum Payment

  • Interest you pay will be high if that's all you do


Early Repayment

  • Highest charges occur at the beginning of the loan


Credit Insurance

  • Loan paid off if insured dies (more expensive than life insurance)


Credit Card Accountability Act of 2009

  • Limits the increase of APR in the first year

  • Restrictions in the insurance from charging higher interest rates on existing balances

  • Teaser rates must be for at least 6 months

  • Issuers must mail statements at least 21 days before payments

  • Disclose information clearly and timely

  • Due dates, late fees, and total cost of making minimum payments

  • Restricts penalties for over the limit fees


Credit Card Problems



Managing Debts

Notify creditors you cannot make a payment

  • See if you can work out a modified payment plan, with the account and collections


Fair Debt Collection Practices

  • Contact before 8:00 am or after 9:00 pm

  • Cannot harass you/ threaten you

  • Make false claims (Sue you or arrest you)

  • Cannot contact employers


Warning of Debt Problems

  • Paying minimum only

  • Missing or alternating payments/paying late

  • Overdraft protection or taking cash advances

  • Using savings to pay routine bills such as food

  • Getting second or third payment notices


Consumer Credit Counseling Service

  • Non-profit which is supported by contributions from banks, merchants, etc.

  • Debt Counseling

  • Avoid service providers with large fees


Bankruptcy: Legal process of some or all the assets of the debtor is unable to pay his or her debts


Chapter 7 Bankruptcy (Most debt forgiven)

  • Submit petition to court, list assets and liabilities, and pay a fee

  • Most assets sold to creditors

Assets not sold

  • Social Security Payments

  • Limited values of equity of home, car, or truck

  • House appliances and goods

  • Trade Tools

    May not have to pay:

  • retail store charges

  • Bank credit card charges

  • Unsecured loans (No collateral)

  • Unpaid hospital bill

May Owe:

  • Taxes and fines

  • Child support and alimony

  • Educational Loans

  • Debt from fraud, embezzlement, etc.


Chapter 13 Bankruptcy

  • Voluntary plan proposed to bankruptcy court for those who want to pay a portion of their debt over 5 years

  • Must have a regular income

  • Can’t have more than $250,000 unsecured debt or $750,000 in secured debt

  • Trustee distributes money to creditors

  • Court allows you to keep property & pay less than full ammount of debts.