1. Chapter 7: Planned Borrowing

2. Objectives Discuss the elements of the planned use of credit.
Establish your own debt limit.
Understand the language of consumer loans.
Describe the sources of consumer loans.

3. Objectives
Calculate the APR and finance charges on both single-payment and installment loans.
Recognize signs of over-indebtedness, know what to do when it occurs, and explain your rights regarding credit collection and bankruptcy.

4. Planned Borrowing DID YOU KNOW!
Most people use installment credit 12+ times during their life.
Yet, only 1:3 shop for credit terms!
DID YOU KNOW!

5. Planned Borrowing
A knowing decision to borrow to finance a purchase or simply to borrow cash.

6. Planning Your Credit Usage
THE TASK OF DETERMINING:
When
How often
How much

7. Establishing a Debt Limit
The debt limit most people establish for themselves is lower than what lenders would be willing to lend.

8. Establishing a Debt Limit
Debt-payments-to-disposable-income method
Ratio of debt-to-equity method
Continuous-debt method

9. Credit Capacity Indicators
Debt Payments-to-Income Ratio
monthly payments*
monthly after tax income
*Not including housing
6-9

10. Credit Capacity Indicators
Debt To Equity Ratio
total liabilities =
Should be < 1
net worth*
*Excluding home value
6-10

11. Debt-Payment Limits as a Percentage of Disposable Income
For Current Debt*
Take on Additional Debt?
10 or less
Safe limit; borrower feels little debt pressure.
Could be undertaken cautiously.
11 to 15
Possibly safe limit; borrower feels some pressure.
Should not be undertaken.
16 to 20
Fully extended; borrower hopes that no emergency arises.
Only the fearless or foolhardy ask for more.
21 to 25
Overextended; borrower worries about debt
No, borrower should see a credit counselor.
* Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives.

12. Setting Debt Limits for Dual-Earner Households
If one of the earners reduces/eliminates earnings, debts that had been manageable with two incomes may become overwhelming.
BEWARE!

13. The Language of Consumer Loans
Installment loans
Secured/unsecured loans
Purchase loan installment contracts

14. Monthly Installment Payments (Principal and Interest)
Monthly Installment Payment (Principal and Interest) Required to Repay $1,000*
Terms of Installment 4% 6% 8%
10%
12%
14%
16%
18%
20%
1 year (12 months)
85.15
86.07
86.99
87.92
88.85
89.79
90.73
91.68
92.63
2 years (24 months)
43.42
44.32
45.23
46.14
47.07
48.01
48.96
49.92
50.90
3 years (36 months)
29.52
30.42
31.34
32.27
33.21
34.18
35.16
36.15
37.16
4 years (48 months)
22.58
23.49
24.41
25.36
26.33
27.33
28.34
29.37
30.43
5 years (60 months)
18.42
19.33
20.28
21.25
22.24
23.27
24.32
25.39
26.49
*To illustrate, assume you want to know how much the monthly payment would be to finance a $9,000 loan at 10% for 3 years. To repay $1,000, the figure is $32.27, multiply by 9 (for $9,000) to determine that $ is required for 36 months of payments. When using amounts greater or less than $1,000, convert using decimals. For example, a loan of $950 at 10 percent for 3 years would be calculated as follows: $32.27 x 0.95 = $30.66.

15. Sources of Consumer Credit
Parents and family members
Commercial bank
Credit union
Life insurance company
Savings and loan association
Finance company
Retailers
Cash advances

16. Truth In Lending Rights
The Truth In Lending Act requires creditors to provide you with accurate and complete credit costs and terms. APR
Creditors must disclose
credit terms and information...
In a clear and conspicuous manner
In a form you can keep

17. Calculating Finance Charges and APR
APR CALCULATIONS FOR SINGLE-PAYMENT LOANS:
Simple-interest method
Discount method

18. Calculating Finance Charges and APR
APR CALCULATIONS FOR INSTALLMENT LOANS:
Simple-interest method
Add-on method
Discount method

19. Formula 7.3

20. Dealing With Over-indebtedness
TEN SIGNS OF OVER-INDEBTNESS:
Exceeding debt/credit limit.
Running out of money.
Paying only the minimum due.
Requesting new cards and increases in credit limits.
Paying late or skipping payments.
Not knowing how much you owe.
Taking add-on loans.
Using debt consolidation.
Receiving notice of repossession or foreclosure.
Experiencing garnishment.

21. Dealing With Over-indebtedness
Federal law regulates debt collection
Bankruptcy as last resort
Chapter 13
Chapter 7

22. History of Bankruptcies Since 1961

23. Fair Debt Collection Practices Act
Collection agencies...
Can’t be abusive or threaten
Can’t call you at work if you say no
Can’t tell boss and friends
Can’t call you at odd hours
Must follow set procedures
The act does not apply to creditors that try and collect the debt themselves

24. Impact of Divorce on Credit
Pay attention to accounts held jointly
Ask creditors to close joint accounts
Remember, creditors can legally collect from either party
Get updated copy of credit report

25. Alternative Lenders Pawnshop Rent-to-own program Check cashers
Rapid refund services

26. Manage Over-indebtedness
1. Determine what is owed.
2. Focus budget on debt reduction.
3. Contact creditors.
4. Take on no new credit.
5. Refinance.
6. Find good help.
7. Avoid bad help.

27. Manage Student Loan Debt
1. Choose most advantageous repayment pattern allowed.
2. Consolidate student loans.
3. Pay electronically.
4. Be punctual with repayments.
5. Refinance with second mortgage loan.