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What is Credit? The privilege of using someone else’s money for a period of time. The creditor loans the money The debtor is the person/business that.

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Presentation on theme: "What is Credit? The privilege of using someone else’s money for a period of time. The creditor loans the money The debtor is the person/business that."— Presentation transcript:

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2 What is Credit? The privilege of using someone else’s money for a period of time. The creditor loans the money The debtor is the person/business that receives the loan

3 Disadvantages Of Credit 1) Credit Costs (interest) 2) Improved buying  overbuying 3) Financial Difficulties

4 Types and Sources of Credit Charge Accounts Contract between consumer and retailer Exists as 30 day or revolving credit accounts Layaway plans involve setting the product aside while the customer makes equal payments for a set period. Credit Cards Issued by retailers, banks, travel/entertainment companies Limits are based on your credit score

5 Types and Sources of Credit Instalment Sales Credit Regular set payments must be made (financing) Term Loans and Leases Term loans set out predetermined set payments Leases involve “renting, sometimes to own Demand Loans Short term loan with flexible terms of repayment. Collateral required.

6 Types and Sources of Credit Student Loans Mortgage Loans Purchase of a home ( lasts 25 years)

7 The Cost of Credit Cost of Credit depends on: Principal ( the amount of money borrowed) Term ( amount of time required to pay back the principal) Interest rate Inflation Security/Collateral ( offering something of value if the loan can’t be repaid) Simple Interest I (interest) = P (principal) x R (interest rate) x T ( time)

8 Interest Equations Simple Interest Compound Interest I (interest) = P (principal) x R (interest rate) x T ( time) A = P (1+ i) n A = Amount of Money P= Principal i= interest rate per conversion period ( expressed as a decimal) n = # of conversion periods A = P (1+ i) n A = Amount of Money P= Principal i= interest rate per conversion period ( expressed as a decimal) n = # of conversion periods

9 3 C’s of Credit Character Ability to repay on time, trustworthiness, reliability Capacity Ability to make the payments Capital Value of borrowers assets


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