Borrowing Basics 1

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.

Borrowing Basics 3 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.

Borrowing Basics 4 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.

Borrowing Basics 5 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.

Borrowing Basics 6 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.

Borrowing Basics 7 Collateral Property or another asset you promise to give to the bank if you can’t repay your loan.

Borrowing Basics 8 Collateral Items CarProperty

Borrowing Basics 9 Types of Loans Consumer installment loans Credit cards Home loans

Borrowing Basics 10 Consumer Installment Loan A loan used to pay for personal expenses: Automobile Computer Furniture College tuition

Borrowing Basics 11 Credit Cards Give you the ongoing ability to borrow money for: Household, Family, and Personal needs.

Borrowing Basics 12 Home Loans Home purchase loans Home refinance loans Home equity loans

Borrowing Basics 13 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?

Borrowing Basics 14 The Cost of Credit Fees Interest

Borrowing Basics 15 Fees Annual maintenance fees Service charges Late fees

Borrowing Basics 16 Interest The money financial institutions charge for letting you use their money. The rate of interest is either: Fixed Variable

Borrowing Basics 17 How Much Does Credit REALLY Cost? Amount financed$5, APR12% Finance charge $ Total paid$5, Watch out for “penalty APRs” and “universal default” on credit cards.

Borrowing Basics 18 The True Cost of Alternative Financial Services Rent-to-own services Pay-day loan services Refund anticipation services

Borrowing Basics 19 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.

Borrowing Basics 20 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.

Borrowing Basics 21 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.

Borrowing Basics 22 The “Four Cs” of Credit Decision Making Capacity Capital Character Collateral