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Using Consumer Loans

Using Consumer Loans. #7. Consumer Loans. Formal, negotiated contracts One-time transaction Usually for big-ticket items No more credit is available once repaid. Types of Consumer Loans. Auto loans Durable goods loans Education loans Personal loans Consolidation loans. Student Loans.

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Using Consumer Loans

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  1. Using Consumer Loans #7

  2. Consumer Loans Formal, negotiated contracts One-time transaction Usually for big-ticket items No more credit is available once repaid Ch. # -

  3. Types of Consumer Loans Auto loans Durable goods loans Education loans Personal loans Consolidation loans Ch. # -

  4. Student Loans Federally sponsored loans: Stafford Loans (Direct & Federal Family Education Loans—FEEL) Perkins Loans Parent Loans (PLUS) Ch. # -

  5. Federal Student Loans Ch. # -

  6. Consumer Loans Single Payment Installment • Fixed • Variable Interest Rate Ch. # -

  7. Where Can You Get Consumer Loans? Commercial Banks Consumer Finance Companies Credit Unions Savings and Loan Associations Sales Finance Companies Life Insurance Companies Ch. # -

  8. Managing Your Credit Compare loan features Finance charges Loan maturity Total cost of transaction Collateral requirements Other considerations such as payment date, prepayment penalties, late fees Shop carefully before borrowing Ch. # -

  9. Keep Track of Your Credit Keep inventory sheet of debt Know total monthly payments Know total debt outstanding Check your debt safety ratio: • Total monthly consumer debt pmts • Monthly take-home pay Ch. # -

  10. Single-Payment Loans Loan collateral Lien chattel mortgage collateral note • Loan maturity • Loan repayment • Prepayment penalty • Loan rollover Ch. # -

  11. Finance Charges and the APR Discount Method -Interest (calculated on principal) is subtracted from loan amount and remainder goes to borrower Finance charges paid in advance APR will be higher than stated interest rate Simple Interest Method - Calculated on outstanding balance Ch. # -

  12. FS = P x r x t Where FS = finance charge using simple interest method P = principal loan amount r = stated annual interest rate t = term of loan Simple Interest Method Example-Calculate finance charges and APR on a $1000 loan for 2 years at 8% interest rate (Assume interest is the only finance charge) Ch. # -

  13. Using the Simple Interest Method Interest = Principal x Rate x Time = $1000 x .08 x 2 Finance Charge = $160 • Receive full loan amount ($1000) but pay back $1600(loan amount + finance charge) • Most consumer friendly method Ch. # -

  14. Simple Interest Method APR = ($160 2) $1000 Annual Percentage Rate = Average annual finance charge Average loan balance outstanding APR is same as stated rate = 8% Ch. # -

  15. Discount Method Interest = Principal x Rate x Time = $1000 x .08 x 2 Finance Charges = $160 Calculate same as simple interest method but subtract finance charges from loan amount ($1000 – $160) Borrower receives $760 now, pays back $1000 Ch. # -

  16. Discount Method APR = ($160  2) = $80 ($1000 – $160) = $840 = 9.52% Annual Percentage Rate = Average annual finance charge Average loan balance outstanding Ch. # -

  17. Installment Loans Repay debt in a series of equal payments Payments includes principal and interest Wide maturity range 6 months to 10 years or longer Ch. # -

  18. Calculating Finance Charges on Installment Loans Simple Interest Method Calculated on outstanding (declining) balance each period Add-On Method Finance charges calculated on original loan balance added to principal Ch. # -

  19. Example Calculate the finance charges and APR on a $1000 loan to be repaid in 12 monthly installments at an annual interest rate of 8% (Assume interest is the only finance charge) Calculating Finance Charges on Installment Loans Ch. # -

  20. Calculator (Set on 12 P/YR and END mode) 1000 +/- PV 8 I/YR 12 N PM = $86.99 Calculating Finance Charges on Installment Loans Use Exhibit 7.5 (Table calculated using $1000 loan) Find payment for 12 months at 8% interest: $88.99 Ch. # -

  21. Simple Interest Method Simple interest calculated on outstanding loan balance each period Each payment decreases outstanding loan balance Subsequent payments incur a lower finance charge More of next payment goes towards repaying principal Ch. # -

  22. Simple Interest Method $86.99 x 12 = $1,043.88 Loan amount = – 1,000.00 Interest paid = $ 43.88 Total amount paid over 12 months Ch. # -

  23. Add-On Method Calculate finance charges on the original loan amount $1000 x .08 x 1 = $80 Add these charges to principal $80 + $1000 = $1,080 Divide this amount by the number of periods to arrive at payment $1,080  12 = $90.00 Ch. # -

  24. Add-On Method Use financial calculator to figure APR for the Add-On Method using payment just determined and solve for interest Set on 12 P/YR and END mode: 1000 +/- PV 90.00 PMT 12 N I/YR 14.45% Ch. # -

  25. Other Loan Considerations Prepayment penalties Rule of 78s = sum-of- the-digits method Credit life insurance and credit disability insurance Avoid if possible - get term insurance instead Buy on time or pay cash? May be better to pay cash — If you have it Ch. # -

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