CONSUMER LOAN SCAVENGER HUNT

By: Luke Magley

Loan Application

Specifications of the loanAmount, Rate, and Nper

Purpose for the Loan

Your informationSSN, phone, employer, income/expenses, assets/liabilities

Installment vs. Single Payment Loans

Installment Loans Single Payment Loans

Interest and principal are paid at the end of each period, usually every month. Most mortgages are installment loans because many individuals would have a hard time budgeting for a single payment loan.

Interest and principal is paid at maturity in a lump sum. An example where a single payment loan would be useful is the construction of a home; the money is used to build the home then the sale of the home is used to pay off the loan.

Consolidation Loans

Used to pay off all other debt and “consolidate” into one loan

Used when an individual has many debt payments

Can possibly lower the interest paid on all your debt and extend the payments over a longer period of time

Kind of like a funnel!

Fixed vs. Adjustable Rate Mortgages

Fixed Mortgages Adjustable Rate Mortgages

Also called “vanilla wafer” mortgages because they are so straightforward, these loans’ interest rates remain the same throughout the term of the loan. You can possibly confront opportunity costs because if interest rates drop, you could have gotten a better deal with an ARM.

Also referred to as ARM’s, these loans’ interest rates will rise and fall periodically, depending upon how the market is doing. These can be risky because if interest rates rise, you will be paying more in interest than if you used a fixed rate mortgage.

Where can I get a Personal Loan or Mortgage?

Commercial Banks – Where most consumer loans are written Bank of America, Wells Fargo, SunTrust, etc.

Credit Unions – Can give you a better rateon your loan CFE Credit Union

Online – Gives you the ability to compare loans side-by-side Lendingtree.com

Shopping for Loans: What should I Consider?

Is it worth it? Buy stuff that will “pay back” the loan STAY AWAY from short-lived consumables

The repayment period should NOT exceed the life of the product!

Specifications of the loan Interest rate, down payment, fees, etc.

Predatory Lending Practices

Financial institutions can take advantage of a consumer in many ways: Excessive fees Prepayment penalties Unnecessary products Forced arbitration Steering and targeting Loan flipping

Federal Legislation Protecting Borrowers

35 states have limits on prepayment penalties

The Truth in Lending Act ensures that consumers get adequate information on their loans from financial institutions

Fair Housing Act – Prohibits financial institutions from discriminating because of race, color, religion, national origin, sex, handicap, or family status.

Important Loan Features

Loan collateral Automobile, jewelry, stocks, bonds, home,

etc.

Loan maturity Single payment or installment loan? Length of maturity

Loan repayment Are there prepayment penalties?

Finance Charge and the APR

APR and interest rate are different because the APR includes fees and penalties

Discount Method – Interest payable is deducted from lending amount $1000 – 5% loan … $950 is given to borrower

and $1000 is paid back Simple Interest – Interest is calculated

daily and because of leap years, you pay more interest than a traditional mortgage. Also, there is no grace period.

Balloon Mortgages

The borrower will make payments in regular periods for a short amount of time, then pay off the rest in one “bullet” payment

May have a fixed or a Floating rate

The Rule of 78

Uses predetermined interest on short-term loans

1+2+3+4+5+6+7+8+9+10+11+12 = 78 On first month, 12/78 of the finance charge

is due. Second month 11/78 of the finance charge is due until on the twelfth month 78/78 (100%) of the finance charge is due

BEWARE OF THIS!!! It could hurt you if you try to pay off early