1. Personal Loans and Purchasing Decisions
Chapter 10
Personal Loans and Purchasing Decisions

2. 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

3. Objective 1 – Describe the features of a personal loan

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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”

10. 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

11. 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

12. 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

13. 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

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

15. 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

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

17. 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)

18. 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

19. 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