Chapter 4: Going into Debt Section 2: Sources of Loans and Credit

Two Credit Sources Banking Institutions Credit Card Companies

Types of Financial Institutions Commercial Banks: checking/saving accts. - Loans to individuals Control the most money; offer the most services Savings and Loan (S&L) Associations: - Savings Institutions primarily provide loans for homes. Savings Banks: Originally served small businesses and homes Originally did not provide Checking

Types of Financial Institutions (Cont’d) Credit Unions: Owned and operated by its members Provides low interest loans to members Good consumer loans, but must join to use Finance Companies: Institution that takes over loans from retailers Usually used with higher risk consumers Consumer Finance Companies Offer sub-prime (High interest) loans to higher risk companies Offer High Rate Credit Cards Use shady business practices

Crisis and Change: The 80’s S&L Banks deregulated Could offer checking accts as well as business loans S&L’s make risky commercial investments Cost tax-payers billions in bailout money

Charge Accounts Buy goods from a company and pay later Regular Charge Account: $500-1,000 Credit limit in which a bill is sent monthly No interest, but bill must be paid immediately Revolving Charge Account: You don’t pay entire monthly bill, interest is added Installment Charge Accounts: Equal payments over a period of time Interest is paid

Credit & Debit Credit Debit: Withdrawn from Checking account Can be used at many different stores Usually charge high interest Debit: Withdrawn from Checking account

Finance Charges (The Cost of Credit) Costs vary from company to company APR: Cost expressed by a yearly percentage

Applying For Credit Credit Bureau: Private Business hired by a lending agency Run Credit Check: Income Current Debts Personal life details Ex. How you’ve repaid debts in the past

Credit Check Reveals “Credit Rating” Higher the number, better chance of getting a loan The 4 C’s of credit worthiness 1.Capacity to pay: Employment History 2.Character: Reputation Ex. Trustworthy, criminal history Collateral: What you are worth Capital: Similar to Collateral, it is personal items of value. Example would be your investment accounts. Shows your past ability to save and accumulate Over 700 is Good, below 600 not so good

2 types of loans Secured: Backed by collateral Unsecured: Loan on reputation alone

Borrowing Responsibilities Pay on time If you don’t, fees will be incurred Keep financial records

Government Regulation of Credit Equal Credit Opportunity Act(1974): Credit cannot be denied based on Race, religion, etc. No discrimination bc. You receive govt. benefits Women were the ones being discriminated

Usury Laws Law restricting the amount of interest that can be charged for credit Interest Ceilings limit the profit a bank can make Early on, this had adverse effects on the economy

The B-Word Bankruptcy: Bankruptcy is not an easy way out Cant pay debt. Turn everything you own over to creditors Bankruptcy is not an easy way out