Loans

Loan An amount of money borrowed and repaid with interest Interest – Money paid for the right to borrow money  Fixed rate – rate that stays the same  Variable rate – rate that can change over the course of the loan

Credit Report Report detailing your credit history, including payments related to bills, loans, and credit accounts and bankruptcies.  Are you certain you can repay the money  When will you be able to repay  What is a fair interest rate

Credit Rating A ranking, typically expressed as a number or letter, based on credit history and used by financial institutions for loan and credit approval.

Annual Percentage Rate (APR) Yearly rate of interest Multiply the monthly rate X 12 = APR Divide the APR/ 12 = Monthly rate

Personal Loan Example You borrow money from a friend that has the same policies as a bank. They loan you $300 dollars with an APR of 24 %. You have a part time job making $200 dollars per month You will pay $50 repayment each month

Personal Loan Example You borrow money from a friend that has the same policies as a bank. They loan you $500 dollars with an APR of 15%. You have a part time job making $300 dollars per month You will pay $75 repayment each month

Personal Loan Interest rate = APR/12 Beginning Balance = amt of loan or previous month ending balance Interest charge = Beginning balance X Interest rate Principle Payment= Amount of money paid on Loan Principle Payment= Monthly payment-Interest charge  Principle = what is owed Ending Balance = Beginning Balance + Interest Charge – Loan Repayment

Truth in Lending Act Requires the lenders to explain how they compute loan charges and list the APR Also gives the borrower three business days to opt out of the loan

Loan Sharks Individuals who charge very high interest rates on loans

Payday Loan Short term, high interest loan

FINANCING AND PURCHASING A HOUSE Buying A Home

Home Loans For most, a home is the most important financial asset A home is one of the biggest investments a person will make.

Home Loans Homes are expensive and usually are not paid for all at once. Most buyers turn to banks, credit unions, or finance companies to get a mortgage to purchase their home

Mortgage A loan used to purchase a home

Down Payment The amount of money a buyer pays in cash for the purchase of a house up front. Depending on buyer qualifications, amount can range from 5% to 20% 20% is common

Home Mortgage A large amount of money usually cannot be paid back quickly. Instead, pay back small amounts each month  Plus interest. Home loans are considered long-term loans  15-year  30-year

Home Mortgage Banks will charge interest on the mortgage  APR Part of the monthly payments will cover interest charges The remaining payment goes to reduce the principle.  Principle – the remaining amount owed

Home Mortgage Interest rate on mortgage will be based on:  Borrowers credit rating  Length of loan  Down payment amount

Home Mortgage A longer the life of the loan, the smaller the monthly payments  More interest is paid over time The shorter the life of the loan, the larger the monthly payments  Equity in the home is built faster

Home Mortgage Equity – The difference between the homes market value and the remaining balance of the mortgage  Equity = MKT value – Remaining loan balance

Home Mortgage Amortization Schedule – A schedule for repaying the loan An amortization schedule will show:  Month  Interest Rate  Beginning Balance  Interest Charge  Loan Payment  Principle Payment  Ending Loan Balance for the month

Home Mortgage Interest rate = APR / 12 Beginning Balance Interest Charge = Beginning Balance X Interest Rate Loan Pmt = GIVEN, same each month Principle Pmt = Loan Pmt – Interest Charge Ending Balance = Begin Balance – Principle PMT

Other costs of Home Loans Closing Costs – Fees paid in addition to the cost of the home Prepayment Penalties – fees designed to keep the borrower from paying the loan off early

Refinancing Refinancing – Paying off the original loan by taking out a new loan against the remaining loan balance

Foreclosure When borrowers are unable to pay their loans on time, they are delinquent.  Delinquent – Past due on a scheduled loan payment Foreclosure – legal process that allows a lender to take back ownership of the property if the loan is not paid

Auto Loans

A car loan will probably be the second largest purchase in a lifetime, next to a house. Many people trade in their old car. The old car is not worth a new car, but still has value.

Auto Loans Trade-in Value – The amount the dealer gives you for your old car as partial payment for the car you want to purchase

Auto Loans Many times, the trade-in value is called the  Book Value Book value – How much a car is worth based on condition, mileage, and other factors  Kelly Blue Book

Auto Loans New car dealers sometimes offer incentives to encourage people to buy. Incentives – Factors designed to encourage people to purchase a vehicle. Incentives can be:  Special finance rates  Rebates  Other offers

New vs. Pre-owned Cars New Cars  New cars offer the latest in technology, features, and design, and usually come with a warranty  New cars also cost more and lose some value immediately

New vs. Pre-owned Cars Used Cars  Less expensive  May lack certain features you are seeking  May not be in the best shape  May have high mileage  May have limited items covered by the warranty  May have a history of repair problems

New vs. Pre-owned Cars When considering which to buy, all factors must be considered, along with what you can comfortably afford.

Hidden Costs in Autos Paying for the car is only part of the cost Additional Hidden Costs:  Insurance Premiums  Maintenance Costs  Repair Costs  Cost of Gasoline  Taxes and Licensing Fees

Lease vs. Purchase Lease – Paying only a portion of the vehicles sales price and returning it to the dealer at the end of the specified time. Purchase – Paying the cars full price and keeping in as long as you want

Lease vs. Purchase Lease – Pros  Usually little or no down payment required  Fewer up-front, out of pocket fees  Lower monthly payments  New car every few years  No chance of being “upside down” in the loan  Allows you to have a more expensive car  Some dealers will cover regular maintenance

Lease vs. Purchase Lease – Cons  You always have a car payment  You will never own the car  Mileage restrictions  Higher insurance coverage costs  Charges for excess wear and tear  Higher credit score requirements  Typically, you must be 18 or older to lease

Lease vs. Purchase Purchase – Pros  You own the car after you make all the payments  Can own the car as long as you want  Can drive as many miles as you want  Insurance costs are usually lower

Lease vs. Purchase Purchase – Cons  Down payment required  Up-front, out of pocket costs  Higher monthly payments  Can end up “Upside down”  Loan limits for the price of the vehicle  Have to pay for vehicle maintenance