1. Borrower Beware 1

2. Why Borrow? 2

3. Consumer Debt for 2012 Averages per US Household: O Average credit card debt: $15,204 O Average mortgage debt: $148,818 O Average student loan debt: $33,005 Total American Consumers owe: O $848 billion in credit card debt O $7.93 trillion in mortgages O $1 trillion in student loans O An increase of 11.9% from previous year Source: http://www.nerdwallet.com/blog/credit-card- data/average-credit-card-debt-household/http://www.nerdwallet.com/blog/credit-card- data/average-credit-card-debt-household/ 3

4. Where can I get a loan? O Bank O Credit Union O Credit Card O Loan Companies 4

5. How do I qualify for a loan? O Financial institutions want to know your credit history and personal information such as: O How much do you owe in debt? O Do you make regular payments on your existing debt? O What is your income? O What is your net worth? 5

6. What is APR? O The annual percentage rate (APR) is the actual annual cost of the loan over the term of the loan. O Since each lender has different loan terms, the federal government requires lenders to disclose the APR. 6

7. How do I compare loans? Compare the APR. 7

8. Understanding Loans O Secure Loan: Loan is secured with collateral. (Collateral is a piece of property that can be sold by the lender to recover all or part of a loan.) O Unsecure Loan: Loan is not secured with collateral. These loans have a higher interest rate since there is no collateral. 8

9. What is a Payday or Title Loans? O Easy access loans are sometimes called title loans or payday loans. They make it “easy” to get a loan. The high cost is due to the short time period of the loan and to the fee. When the interest rate or fee is calculated over the short time period, the Annual Percentage Rate (APR) will be huge. 9

10. How do payday loans work? O A borrower signs over a personal check for collateral to get quick cash. The lender, who advertised 15% interest, agrees not to deposit the check until payday. O Let's say you want to borrow $200 until you get your next paycheck in two weeks. O Calculate the fee: 15% of $200 is $30. O You write a check to a payday lender for $230 O The $30 fee you pay on the loan calculates to an Annual Percentage Rate (APR) of 391%. 10

11. Compare Small Loans Common Small LoanEasy Access Loan Loan Amount$500 Loan Term12 months14 days Interest Rate7%n/a Financial Feenone$50* Annual Percentage Rate Payment Total Interest/Fees *1st 14 day fee is $50, if renewed an additional $50 fee is required. 11

12. Compare Small Loans Common Small LoanEasy Access Loan Loan Amount$500 Loan Term12 months14 days Interest Rate7%n/a Financial Feenone$50* Annual Percentage Rate7.22%260.71% Payment Total Interest/Fees *1st 14 day fee is $50, if renewed an additional $50 fee is required. 12

13. Compare Small Loans Common Small LoanEasy Access Loan Loan Amount$500 Loan Term12 months14 days Interest Rate7%n/a Financial Feenone$50* Annual Percentage Rate7.22%260.71% Payment$43.26 per month$550 due in 14 days Total Interest/Fees *1st 14 day fee is $50, if renewed an additional $50 fee is required. 13

14. Compare Small Loans Common Small LoanEasy Access Loan Loan Amount$500 Loan Term12 months14 days Interest Rate7%n/a Financial Feenone$50* Annual Percentage Rate7.22%260.71% Payment$43.26 per month$550 due in 14 days Total Interest/Fees$43.26 x 12 = $519.12 $500 + $50 = $550 *1st 14 day fee is $50, if renewed an additional $50 fee is required. 14

15. How do I determine how much I will owe? O Go to www.bankrate.comwww.bankrate.com O Choose Loan and amortization calculator O Enter the following: O Loan amount: $5,000 O Loan term: 2 years O Interest rate: 4% O Loan start date: Use today’s date. Monthly payment: $217.12 15

16. How do I determine how much I will owe? O What is your total repayment? $217.12 x 24 months = $5210.88 O How much of the total repayment is interest? $5210.88 - $5000 = $210.88 16

17. What happens if you don’t qualify for 4% interest? O Loan amount: $5,000 O Loan term: 2 years O Interest rate: 6%, 8%, or 10% O Loan start date: Use today’s date. 17

18. What happens if you increase the loan term? O Loan amount: $5,000 O Loan term: 3 years or 4 years O Interest rate: 4% O Loan start date: Use today’s date. 18

19. Credit Cards O A credit card purchase is a loan from the financial institution that issued the card. O Credit card interest rates tend to be higher than rates for other loans. O Credit card companies may charge significant fees related to a credit card and its use. O Borrowers who use credit cards for purchases and who do not pay the full balance when it is due, pay much higher costs for their purchases because interest is charged monthly. 19

20. How do I determine how much I will owe? O Go to www.bankrate.comwww.bankrate.com O Choose Credit card payoff calculator O Enter the following: O Credit card balance: $5,000 O Credit card interest rate: 17% O Payment amount per month: $300 Number of months to payoff: 19 months 20 x $300 = $6000 20

21. What happens if you can’t pay $300 per month? O Credit card balance: $5,000 O Credit card interest rate: 17% O Payment amount per month: $200 or $100 21

22. What happens if you change the interest rate? O Credit card balance: $5,000 O Credit card interest rate: 9% or 14% O Payment amount per month: $300 22

23. What are other fees that credit cards companies charge that are not calculated with the APR? O A credit card company may charge an annual fee. O A credit card company may charge a fee for each transaction. O A credit card company will charge a late fee if the payment is not received by the due date. 23

24. Activity O Use the online calculator to answer questions 17 – 21 on Activity 8.7-1. 24

25. What have you learned? O What questions do I need to ask when getting a loan? O What advice would you give a friend who is about to get a credit card? 25

26. What financial responsibilities are tied to borrowing? O If you borrow money, you are responsible for paying it back. O If you borrow money, you are responsible for making your payments on time. O It is not responsible to borrow money to purchase things you want. Borrow only if it is a necessity. O If you have to get a loan or you have to use a credit card for emergencies, pay off your debt quickly to reduce the paid interest. 26