Consumer Banking Dollars and Sense

Interest Rates – Rules of Commercial Banks – Interest rates charged for loans higher than Savings Banks and interest paid on savings accounts lower than Savings Banks Savings Banks – Interest rates charged on loans lower than Commercial Banks and interest paid on savings accounts higher than Commercial Banks

Interest Rates - Compounding Compounding is the practice of calculating interest by adding interest payments to the principal and then calculating the next interest payment based on the previously combined principal and interest. The amount of interest earned using this technique is called the APR – Annual Percentage Rate Formula – A=P(1+r/n) nt

Credit Cards Bank Cards – issued through banks or financial arms of firms No annual membership fee No charge if bill paid in full by due date Allows installment paying High interest rates if using installment plan (17% - 25%) Credit limit set by lender Example – Visa and MasterCard

Credit Cards Bank and Entertainment Cards – issued by financial services companies Originally available only for business use, now to anyone Annual membership fee Bill has to be paid in full at end of billing cycle Credit limit set by issuer Example – American Express

Credit Cards Charge plates – credit cards issued to customers by retailers No annual membership fee Installment payment terms available similar to that of Bank Cards with similar interest rates Credit limit set by issuer Can only be used in issuer’s store

Debit Cards Basically a type of ‘plastic’ check No credit requirement Money available to user linked directly to funds in savings or checking account When used, funds immediately withdrawn from user’s account

The 4 C’s of Credit Capacity – borrower’s ability to repay loan Collateral – asset that can be used by lender to repay loan if borrower defaults Character – borrower’s work and residency histories

Basic Consumer Loans Mortgages – Fixed Rate and Adjustable Rate Mortgages (ARMs) – collateralized loan Car Loans – Fixed Rate collateralized loan Student Loans – Fixed below market rate subsidized (by Federal Government) loans – Stafford Loans