Chapter 7 planned borrowing
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Chapter 7: Planned Borrowing. Discuss the elements of the planned use of credit. Establish your own debt limit. Understand the language of consumer loans. Describe the sources of consumer loans. Objectives. Calculate the APR and finance charges on both single-payment and installment loans.

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Chapter 7: Planned Borrowing

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Chapter 7 planned borrowing

Chapter 7: Planned Borrowing


Objectives

Discuss the elements of the planned use of credit.

Establish your own debt limit.

Understand the language of consumer loans.

Describe the sources of consumer loans.

Objectives


Objectives1

Calculate the APR and finance charges on both single-payment and installment loans.

Recognize signs of over-indebtedness, know what to do when it occurs, and explain your rights regarding credit collection and bankruptcy.

Objectives


Planned borrowing

Most people use installment credit 12+ times during their life.

Yet, only 1:3 shop for credit terms!

Planned Borrowing

DID YOU KNOW!


Planned borrowing1

A knowing decision to borrow to finance a purchase or simply to borrow cash.

Planned Borrowing


Planning your credit usage

When

How often

How much

Planning Your Credit Usage

THE TASK OF DETERMINING:


Establishing a debt limit

The debt limit most people establish for themselves is lower than what lenders would be willing to lend.

Establishing a Debt Limit


Establishing a debt limit1

Establishing a Debt Limit

  • Debt-payments-to-disposable-income method

  • Ratio of debt-to-equity method

  • Continuous-debt method


Credit capacity indicators

Debt Payments-to-Income Ratio

monthly payments*

monthly after tax income

Credit Capacity Indicators

*Not including housing

6-9


Credit capacity indicators1

Credit Capacity Indicators

Debt To Equity Ratio

total liabilities

=

Should be < 1

net worth*

*Excluding home value

6-10


Debt payment limits as a percentage of disposable income

Debt-Payment Limits as a Percentage of Disposable Income

* Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives.


Setting debt limits for dual earner households

Setting Debt Limits for Dual-Earner Households

  • If one of the earners reduces/eliminates earnings, debts that had been manageable with two incomes may become overwhelming.

BEWARE!


The language of consumer loans

The Language of Consumer Loans

  • Installment loans

  • Secured/unsecured loans

  • Purchase loan installment contracts


Monthly installment payments principal and interest

Monthly Installment Payments (Principal and Interest)

Monthly Installment Payment (Principal and Interest) Required to Repay $1,000*

*To illustrate, assume you want to know how much the monthly payment would be to finance a $9,000 loan at 10% for 3 years. To repay $1,000, the figure is $32.27, multiply by 9 (for $9,000) to determine that $290.43 is required for 36 months of payments. When using amounts greater or less than $1,000, convert using decimals. For example, a loan of $950 at 10 percent for 3 years would be calculated as follows: $32.27 x 0.95 = $30.66.


Sources of consumer credit

Parents and family members

Commercial bank

Credit union

Life insurance company

Savings and loan association

Finance company

Retailers

Cash advances

Sources of Consumer Credit


Truth in lending rights

Truth In Lending Rights

The Truth In Lending Act requires creditors to provide you with accurate and complete credit costs and terms. APR

  • Creditors must disclose

  • credit terms and information...

  • In a clear and conspicuous manner

  • In a form you can keep


Calculating finance charges and apr

Simple-interest method

Discount method

Calculating Finance Charges and APR

APR CALCULATIONS FOR SINGLE-PAYMENT LOANS:


Chapter 7 planned borrowing

Simple-interest method

Add-on method

Discount method

Calculating Finance Charges and APR

APR CALCULATIONS FOR INSTALLMENT LOANS:


Formula 7 3

Formula 7.3


Dealing with over indebtedness

Dealing With Over-indebtedness

TEN SIGNS OF OVER-INDEBTNESS:

  • Exceeding debt/credit limit.

  • Running out of money.

  • Paying only the minimum due.

  • Requesting new cards and increases in credit limits.

  • Paying late or skipping payments.

  • Not knowing how much you owe.

  • Taking add-on loans.

  • Using debt consolidation.

  • Receiving notice of repossession or foreclosure.

  • Experiencing garnishment.


Dealing with over indebtedness1

Federal law regulates debt collection

Bankruptcy as last resort

Chapter 13 (reorganization)

Chapter 7 (liquidation)

Dealing With Over-indebtedness


History of bankruptcies since 1980

History of Bankruptcies Since 1980


Fair debt collection practices act

Fair Debt Collection Practices Act

  • Can’t be abusive or threaten

  • Can’t call you at work if you say no

  • Can’t tell boss and friends

  • Can’t call you at odd hours

  • Must follow set procedures

  • The act does not apply to creditors thattry and collect the debt themselves

Collection agencies...


Impact of divorce on credit

Pay attention to accounts held jointly

Ask creditors to close joint accounts

Remember, creditors can legally collect from either party

Get updated copy of credit report

Impact ofDivorce on Credit


Alternative lenders

Alternative Lenders

  • Pawnshop

  • Rent-to-own program

  • Check cashers

  • Rapid refund services


Manage over indebtedness

ManageOver-indebtedness

1. Determine what is owed.

2. Focus budget on debt reduction.

3. Contact creditors.

4. Take on no new credit.

5. Refinance.

6. Find good help.

7. Avoid bad help.


Manage student loan debt

Manage StudentLoan Debt

1. Choose most advantageous repayment pattern allowed.

2. Consolidate student loans.

3. Pay electronically.

4. Be punctual with repayments.

5. Refinance with second mortgage loan.


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