Personal Loans and Purchasing Decisions Chapter 10 Personal Loans and Purchasing Decisions

Learning Objectives Describe the key features and qualities of personal loans Explain the issues and challenges of financing a home Discuss the issues and challenges of financing an education Understand the issues and challenges of financing a car

Objective 1 – Describe the features of a personal loan

Personal Loans Why take out a personal loan? You don’t have the cash or would rather use your cash for other needs. Buyers must pay a portion of the purchase price with their own money (down payment) which gives them partial ownership before the loan. The money from the loan makes up the difference between the down payment and the total purchase price Example: $2,000 down payment, car costs $8,000. Your loan = $6,000 Included in the terms of a personal loan: Amount of each payment Interest rate charged Number of monthly payments made

Personal Loan Process Who issues personal loans? Banks, credit unions, major auto companies, appliance retailers, etc. What does the process of a personal loan begin with? An application Cosigner: someone other than the borrower who agrees to sign the loan document and to repay the loan if the original borrower stops making payments After you’ve been approved for a loan, the next step is signing a loan contract

Loan Contract Specifies the dollar amount of the loan Interest rate to be charged Loan repayment schedule (which includes maturity date, or the date at which the loan will be completely paid off) APR = Annual Percentage Rate What it is: rate that factors in all the financings costs so that borrowers know exactly what they are paying and can make informed decisions

Secured vs. Unsecured Loans Has some asset pledged against the loan The lender is assured of winding up with some valuable asset if the borrower fails to pay off the loan Ex: You need a loan and own land. The lender may ask you to sign a document that allows them to sell your land if you don’t repay the loan. Collateral: assets that have been pledged against the loan repayment Defaulting on a loan: when someone stops making payments on a loan and the lender can repossess the item and sell it Have no collateral pledged against the loan Also called signature loans because they’re made solely on the basis of someone’s name or credit history Harder to obtain than secured so it has higher interest rates

Objective 2 - Explain the issues and challenges of financing a home For most people, the biggest single purchase you will make in your life is a home. You will more than likely take out a loan to purchase the home.

Adjustable Rate Mortgage Mortgages Fixed Rate Mortgage Adjustable Rate Mortgage Subprime Mortgage Interest rate remains the same for the life of the loan It will never go up or down Interest rate may go up or down over time The rate change occurs at some preset time (ex: after one year) Amount and direction of rate change depends on changes in economic condition and interest rates When the rate goes up or down, your mortgage rate will, too People choose ARM because the starting rate is often lower than Fixed Rate Teaser rate: extremely low interest rate for a short period of time Higher interest mortgage loans made to people with poor credit scores They have a higher rate of mortgage default Widespread defaults became known as “subprime meltdown” or “subprime crisis”

Other Costs of Buying a Home Closing Costs: Appraisal fees Home inspection fees Mortgage origination fees Loan application fees Filing fees Title insurance “Points” (reduces the interest rate charged to the principal) Can cost several thousands of dollars Some lenders waive many closing costs

Home Equity Loans Home Equity Loans and Home Equity Lines of Credit (HELOCs) have become a popular source of loans for many homeowners What it does: It allows a homeowner to borrow against the equity in his or her home (equity is the difference between the home’s value and the amount you still owe to the lender) Example: Your home is valued at $200,000. You owe $110,000 to the lender. $200,000 - $110,000 = $90,000 in equity If you fail to pay a HELOC, you may lose your home Line of credit: an agreement to allow borrowing as needed up to a certain amount of money, you can not touch it at all or use to make repairs on your home when problems arise, as long as you don’t go over the credit line you were given

Buying vs. Renting BUYING Renting Only buy if you plan on living in the area for several years Requires a down payment You’re in charge of maintenance and upkeep Provides a tax deduction which can lower your taxes You build equity Requires a security deposit to protect the owners from property damage done by renters who move out without paying for the damage Landlord is the one responsible of property maintenance and upkeep, not you Less privacy Less control over painting, hanging pics, etc. May not allow pets

Importance of Insurance Homeowner’s insurance provides insurance protection for your house in the event of a tornado, fire, theft, or other property damage Provides protection if someone gets injured at your house and sues you You can also add additional coverage called policy riders to cover things like jewelry Lenders require that homeowners purchase at least enough homeowner’s insurance to cover the amount of the mortgage on the home Renter’s insurance protects your possessions when you are renting

Objective 3 - Discuss the issues and challenges of financing an education

Remember both loans are still loans and must be repaid Types of Student Loans Federal Stafford Loan Federal Perkins Loan Most common type of federal education loan - they come in two forms: subsidized and unsubsidized Subsidized are need based – you must show financial need in order to qualify – You don’t pay interest while you’re in school – after leaving school you have a 6-month grace period where you don’t accrue interest and don’t have to make payments Unsubsidized – not need based, interest accrues while you’re in school Both have limits on total amount you can borrow For students with “exceptional” financial need Carry a lower interest rate and offer a longer grace period before students repayment Goes to students who come from extreme poverty who will likely not get any financial support from their parents to attend school Remember both loans are still loans and must be repaid

Objective 4 - Understand the issues and challenges of financing a car

Financing Your Car Many people finance through the dealership or from a bank Loans typically run from 3-6 years for new cars Longer loan periods generally mean lower monthly payments – but also that the borrower will pay more in interest over the life of the loan When buying a used car, look up the market value on a reputable source online like Kelley Blue Book You can use sources like eBay, AutoTrader, and other sites to find used vehicles Be sure to use CARFAX to learn about the car’s history before you buy it (shows if it’s been in an accident or flooded)

Leasing a Car A lease is a long-term rental agreement You pay a monthly payment like on an apartment and you return the vehicle at the end of the lease Requires a small down payment, if a down payment is required at all You don’t OWN the car so it isn’t an asset You can’t sell it When you own the car you’re responsible for maintenance and upkeep Some leased cars have mileage limits or you’ll face additional charges Penalties for ending lease early

Importance of Car Insurance Whether you lease or buy, you should have car insurance Protects you if you get in an accident and your vehicle needs repair Liability coverage covers any damage you do to others Property damage liability – covers repair to their vehicles Bodily injury liability – covers cost you may be responsible for if you’re deemed at fault for an accident that injures or kills someone Doesn’t cover any damage done to YOU or YOUR vehicle Collision – protects you car if damaged or totaled in an accident Comprehensive – covers if your car is stolen, damaged by an act of nature, if you hit a deer