Credit and Banks How does credit work and what do banks do?

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Presentation transcript:

Credit and Banks How does credit work and what do banks do?

Credit Credit is the receiving of funds to buy goods and services today with the promise to pay for them in the future. – Principal- in business terms, it is the amount originally borrowed. – Interest- the amount the borrower must pay for the use of someone else's money. (That someone else may be a bank, credit union, credit card, store card, your parents)

Why would people Use Credit? Many items are big-ticket items, products that are major purchases. – Have your groups take 3 minutes and think up ten big ticket items. The decision to use credit involves whether the satisfaction the borrower gets from the purchase is greater than the cost of the interest. – In your groups, take 3 minutes and discuss whether your big ticket items would be worth the wait or should you borrow money.

Where to get your money Commercial Banks- Most of the funds and the widest range of services are offered today by Commercial banks. They offer a wide variety of services, but make most of their money from checking and savings accounts and loans. Savings and Loans- Accept deposits, but mostly are in business to lend out loans. Often they have better interest rates because they specialize in loans. Credit Unions- operate by members to provide members savings accounts and low interest loans to only its members.

How do they work A person, lets call them, “Student A”, has some money and does not want to spend it yet, but also want to keep it safe. The person has two choices. – (Take 10 seconds and figure out the two choices.) What are some of the advantages and disadvantages of choice one? What about choice two?

Banks Continued So, Student A decides to place the money in a bank, because they are going to pay 2% interest over the course of the year. Now, another person, Student B, wants to buy a new car for 20,000$. That student can purchase the car in one of two ways. – Take a minute with your group and write down those two ways as well as the advantages and disadvantages to both ways of purchasing.

Getting a loan Student B decides to go the bank loan route, so the bank offers the student a loan. The bank loans the student the 20,000$ with the idea that the student will pay back the loan and the one time payment of 8% interest. (Interest is calculated a different way, but that is for a different lesson) The difference between the interest that bank gets from Student B and the interest they have to pay Student A is how a bank makes money.

Figuring it all out Student A has placed in the savings account 1,000$ with the idea that they will make 2% interest on the money. Student B has taken out a loan for 20,000$ with a one time interest payment of 8%. – Remember, if Student B does not pay the loan, the bank gets the car. How much money does Student A make on the savings account and how much does Student B’s car cost after paying off the loan?