Credit and Loans

Objectives Identify 3 C’s of Credit Identify 4 major loan types Analyze how the costs and benefits of each loan type.

3 C’s of Credit CAPACITY TO REPAY – Pay Stubs – Checking/Savings/Investments – Future Job Prospects – *Debt to Income Ratio*.28 x Gross Monthly Income for Housing.36 x Gross Monthly Income for Housing + Recurring Expenses (Utilities, Other loans, ect)

COLLATERAL – Used to guarantee loan repayment Credit Record House Car Collateral often required for large loans or risky loans (title loans, pawn shops)

CHARACTER – Credit Record of Accounts – Co-signers – References – – Federal law allows you to view your credit report once a year for free – Close any unused accounts, check for fraud – Credit Score measures 3 C’s and predicts risk

Smart Credit Moves Avoid paying interest-Pay Balance IN FULL EVERY MONTH! Check Credit Report Yearly Use Credit to advance your Financial position (buy a car for work, get more education, buy a house)

Dumb Credit Moves Make Late Payments/No Payments Using Check Cashing Stores Rent-to-Own Rims and Furniture Tattoo your Social Security Number on your forehead and stand outside Home Depot!

Loan Types Mortgage – Used to buy “real” property like land, house Purchase usually appreciates over time – Usually paid over years, with interest Payments begin within 60 days of purchase – Fixed Rate Interest sets your payments – Adjustable Rate Interest moves with Federal Reserve rates – When should you choose Fixed Rate?

Auto Loans – Used to buy vehicle Purchase usually depreciates over time – Usually paid over 3-5 years, with Interest Payments begin within 60 days of purchase – Buy a reliable car that fits your needs – DO YOUR MAINTENANCE!!!!!

Student Loans – Pays for tertiary training (University/College, Vocational Training) – Usually paid over 10 years Payments begin 6 months after graduation or dropping out. Only death voids student loans! Stafford Loan interest rate is 6.8% Fixed – Pick a “employable” major with an interesting minor – Attend the best school you can afford

“Signature” Credit (Credit Cards) – Used for small-medium purchases – Revolving balance with minimum pays – Interest between 7.9% and 21.9% – “Rewards” Cards can save you money IF IF IF IF you pay the balance monthly

Amortization During a loan, you only pay interest on the amount borrowed for that month. As you pay the principal back along with the interest, the principle amount shrinks. This process is called amortization.