Chapter 4: Consumer Credit

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## Chapter 4: Consumer Credit

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**Chapter 4: Consumer Credit**4.2 Loans**What information do you need to know before taking out a**loan? • Brainstorm with your groups • Make a list of 5 things you might need to know before you take out a loan • Make a list of 5 things you might take out a loan for**The basics…**• When borrowing money, you must sign an agreement called a promissory note • This states the conditions of your loan including: principal, APR, monthly payment, number of payments to be made, finance charge, due dates for payments and fees for late payments • The amount you are borrowing is called the principal • The interest rate you pay is per year and is called the annual percentage rate (APR)**Not all loans are the same…**Some terms to know for different types of loans • Cosigner – a person that agrees to pay back the loan of the borrower is unable to do so • this often occurs when the borrower has minimal credit • Life Insurance – a creditor can require the borrower to have life insurance that will cover the loan if the borrower dies before the loan is paid off**Some more important terms**• Prepayments Privilege – Allows the borrower to make payments before the due date to reduce the amount of interest • Prepayment Penalty – requires borrower to pay fee if they wish to pay back an entire loan before the due date • Wage Assignment – a voluntary deduction from an employee’s paycheck, used to pay off debts • a type of electronic transfer**Even more!!!**• Wage Garnishment – an involuntary form of wage assignment • This is often due to a court order • For example: child support • Balloon Payment – when the last monthly payment on a loan is much higher than the previous payments**Who gives out loans????**Organizations that extend loans are called lending institutions • Banks • Must apply for loan • Credit Unions • Members only • Consumer Finance Companies • Lend to people with poor credit • Life Insurance Companies • Policyholders only • Pawnshops • Small, quick loans that require collateral (a customer leaves a personal belonging)**Example 1**• What is the monthly payment for a $4,000 two-year loan with an APR of 8.5%? • Check Your Understanding • Juan is borrowing $41,000 for 5 years at an APR of 6.5%. What is the monthly payment?**Example 2**• What is the total amount of the monthly payments for a $4,000, two-year loan with an APR of 8.50%? • Check Your Understanding • The total of monthly payments for a 5-year loan is $7,171.20. The APR is 7.25%. How much money was originally borrowed?**Example 3**• Find the finance charge for a $4,000, two-year loan with an 8.5% APR? • Check your understanding • Karl is borrowing x dollars over a three-year period. The monthly payment is y dollars. Express his finance charge algebraically.**Example 4**• Mark bought a new car. The total amount he needs to borrow is $28,716. He plans on taking out a 4-year loan at an APR of 5.12%. What is the monthly payment?**Ch 4 Asnmt 2**• Pg. 185 #2-13