ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 LESSON 10.3 Sources of Consumer Credit GOALS ► Explain differences between a secured and an unsecured loan. ► Describe benefits and costs of using credit cards. © 2010 South-Western, Cengage Learning Slide 1

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 KEY TERMS  secured loan  collateral  installment loan  unsecured loan  regular charge account  revolving charge account  grace period  credit limit © 2010 South-Western, Cengage Learning Slide 2

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 Types of Consumer Borrowing ► Secured loan is backed by something of value pledged to ensure payment. ► Collateral – The property pledged to back the loan ► Installment loan – Is a loan repaid in a certain number of payments with an interest rate that stays fixed for a period of time. Usually lasts the life of the loan. ► Unsecured loan – is not backed by collateral. The lender grants you credit based on creditworthiness alone. If your credit history is good you can get unsecured loans. The loans are usually at a higher interest rate. © 2010 South-Western, Cengage Learning Slide 3

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 Sources of Loans ► Banking institutions ► Other sources of consumer loans ► Finance companies ► Payday loans ► Life insurance companies ► Credit card cash advances ► Pawnbrokers ► Rent-to-own companies © 2010 South-Western, Cengage Learning Slide 4

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 Credit Cards ► Regular charge accounts – You are not allowed to carry credit. You must pay your balance in full each month ► Revolving charge accounts – Allows you to carry a balance from one month to the next. ► Sources of credit cards – Visa, MasterCard, American Express, and Discover issue most credit cards. ► Credit card incentives – Some banks and other organizations offer incentives to use their card. For example Airlines offer Miles. Cash back (with limitations) © 2010 South-Western, Cengage Learning Slide 5

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 Credit Card Costs ► Annual fees - range from $0 - $ ► Interest - Applies to unpaid balances. Rates Vary ► Grace Period – is the time between the billing date and the payment due date when no interest is charged. ► Limits and penalties – ► Credit Limit – This is the maximum amount you are allowed to charge. Exceeding your limit incurs extra fees. © 2010 South-Western, Cengage Learning Slide 6

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10 Control Credit Card Costs ► A loan as an alternative ► The minimum payment trap ► Choose the least expensive card © 2010 South-Western, Cengage Learning Slide 7

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10  What is the difference between a secured and an unsecured loan?  What should you consider when choosing a credit card? © 2010 South-Western, Cengage Learning Slide 8

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10  What is the difference between a secured and an unsecured loan? A secured loan is backed by a thing of value (collateral). Borrowers risk the loss of their pledged collateral if they are unable to repay the loan. An unsecured loan has no such collateral. Unsecured loans generally carry high interest rates because of the increased risk taken on by the lender. © 2010 South-Western, Cengage Learning Slide 9

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10  What should you consider when choosing a credit card? The cost of the card (annual fees, interest rates) Limits and penalties associated with the card Whether the card offers incentives or supports organizations you consider valuable © 2010 South-Western, Cengage Learning Slide 10