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Chapter 7: Planned Borrowing

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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  1. Chapter 7: Planned Borrowing

  2. 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

  3. 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

  4. Most people use installment credit 12+ times during their life. Yet, only 1:3 shop for credit terms! Planned Borrowing DID YOU KNOW!

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

  6. When How often How much Planning Your Credit Usage THE TASK OF DETERMINING:

  7. The debt limit most people establish for themselves is lower than what lenders would be willing to lend. Establishing a Debt Limit

  8. Establishing a Debt Limit • Debt-payments-to-disposable-income method • Ratio of debt-to-equity method • Continuous-debt method

  9. Debt Payments-to-Income Ratio monthly payments* monthly after tax income Credit Capacity Indicators *Not including housing 6-9

  10. Credit Capacity Indicators Debt To Equity Ratio total liabilities = Should be < 1 net worth* *Excluding home value 6-10

  11. 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.

  12. 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!

  13. The Language of Consumer Loans • Installment loans • Secured/unsecured loans • Purchase loan installment contracts

  14. 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.

  15. Parents and family members Commercial bank Credit union Life insurance company Savings and loan association Finance company Retailers Cash advances Sources of Consumer Credit

  16. 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

  17. Simple-interest method Discount method Calculating Finance Charges and APR APR CALCULATIONS FOR SINGLE-PAYMENT LOANS:

  18. Simple-interest method Add-on method Discount method Calculating Finance Charges and APR APR CALCULATIONS FOR INSTALLMENT LOANS:

  19. Formula 7.3

  20. 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.

  21. Federal law regulates debt collection Bankruptcy as last resort Chapter 13 (reorganization) Chapter 7 (liquidation) Dealing With Over-indebtedness

  22. History of Bankruptcies Since 1980

  23. 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...

  24. 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

  25. Alternative Lenders • Pawnshop • Rent-to-own program • Check cashers • Rapid refund services

  26. 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.

  27. 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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