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