borrowing basics 1. 2 purpose borrowing basics: describes how credit works and the types of credit...
Post on 21-Dec-2015
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TRANSCRIPT
Borrowing Basics 2
Purpose
Borrowing Basics:
• Describes how credit works and the types of credit available.
• Helps you determine if you are ready to apply for credit.
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Objectives
By the end of this course, you will be able to:
• Define credit.
• Explain why credit is important.
• Distinguish between secured and unsecured loans.
• Identify three types of loans.
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Objectives (Continued)
• Identify the costs associated with getting a loan.
• Explain why it is important to be wary of rent-to-own, pay-day loan, and refund anticipation services.
• Determine if you are ready to apply for credit.
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Credit
• Credit is money you borrow to pay for things.
• It is also called a loan.
• “Good” credit means making payments on time.
• “Bad” credit means it will be harder to borrow in the future.
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Why Credit Is Important
• It can be useful in emergencies.
• It’s more convenient than carrying cash.
• It lets you make large purchases.
• It can affect your ability to get employment, housing, and insurance.
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Collateral
Property or another asset you promise to give to the bank if you can’t repay your loan.
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Consumer Installment Loan
A loan used to pay for personal expenses:
• Automobile
• Computer
• Furniture
• College tuition
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Credit Cards
Give you the ongoing ability to borrow money for:
• Household,
• Family, and
• Personal needs.
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Borrowing Money Responsibly
• Would you use credit to pay overdue bills?
• Would you use credit to make a purchase even if you could pay cash?
• Would you use credit if you really wanted something but could not afford the monthly payment?
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Interest
The money financial institutions charge for letting you use their money.
The rate of interest is either:
• Fixed
• Variable
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How Much Does Credit REALLY Cost?
• Amount financed $5,000.00
• APR 12%
• Finance charge $600.00
• Total paid $5,600.00
Watch out for “penalty APRs” and “universal default” on credit cards.
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The True Cost of Alternative Financial Services
• Rent-to-own services
• Pay-day loan services
• Refund anticipation services
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Rent-to-Own Services
• You use the item by making monthly or weekly payments.
• The store owns the item until you make your final payment.
• Using rent-to-own services is more expensive than getting a consumer installment loan.
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Pay-Day Loans
Loans that:• Are made for a fee to people who need
money right away.• Are paid back with the borrower’s next
paycheck.• Are renewed for an additional fee if not
paid off in the agreed-on time period.• Should be used only for emergencies.
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Refund Anticipation Loans
• These short-term loans are secured by your income tax refund.
• The money for the loans comes from a bank or finance company.
• They are more costly than you might think.