Unit7:BorrowingMoney

PersonalFinancialLiteracy

Objectives

•  Identifywaystoestablishagoodcreditrecord.

•  Discusstheimportanceofreviewingcreditreports.

•  Determinehowandwheretogetaccuratecreditscores.

•  Formulateoptionsforfinancingavehicle.•  Discussfactorsthatinfluencethevehicleyouleaseorpurchase.

Objectives-Continued

•  Listtheadvantagesanddisadvantagesofleasinganautomobile.

Credit

•  Supplyofmoney,goods,orservicesinpresenttimeinexchangeforpromiseoffuturepayment

•  Goodwaytoobtainthingsyouwantandneed•  Canleadtofinancialproblems

What’sonaLoanApplication?

•  Asksfor:– placeofemployment–  lengthofemployment– howmuchyouearn– assets– howlongyouhavelivedatyourresidence– whatyouarepayingforhousing–  financialaccountsandcreditreferences

CreditRecord

•  Borrowingandrepaymenthistory•  Howmuchyouowecreditors•  Historyoflatepayments•  Canstartasearlyasage16•  Onrecordupto7years(longer,ifyou’vedeclaredbankruptcy)

•  Sourcesofincome

CreditRecord

•  Typeofhouseyoulivein•  Anylegaljudgments•  AreNOTallowedtoreveal:– Gender– Religion– Race– Age– Countryoforigin

HowtoEstablishCredit

•  Payutilitybillsontime•  Havesavingsandcheckingaccount

•  Makedepositsanddon’tbeoverdrawn

•  Applyforcreditcard•  Makecreditcardpurchasesandpaythemoff

ManagingCreditRecord

•  Paybillsbeforetheyaredue•  Makemorethanminimumpayment•  Keepbalanceslow•  Don’toveruseorapplyfortoomanycreditcards

•  Makeregulardepositstosavingsaccounts

CreditReports

•  FICO,Equifax,Experian,TransUnion•  Reviewannually•  Freereportfromeachcreditbureaueachyear–doesnotincludeacreditscorethough

TheFourCs•  Character–Yourreputationasaborrower.Howresponsible

haveyoubeen?Haveyouhadlatepaymentsordelinquentaccounts?

•  Capacity–Aborrower’sabilitytopaybackhis/herloan.Maycomparedebttoincomeanddebtthatyoutakeonandpayoffregularly.

•  Capital–Whatyouownsuchasmachineryandequipmentorcash.

•  Collateral–Assetsthatalendercantakepossessionofifaborrowerdefaultsonhis/herloan.

FICO•  TypeofcreditscorecreatedbyFairIsaacCorporation

•  Basedon:– Credithistory(35%ofscore)– Currentlevelofdebt(30%)– Lengthoftimeusingcredit(15%)– Applyingfornewcredit(10%)– Typeofcreditused(10%)

FICO•  Scoresrangefrom300to850•  Determineswhetheryouqualifyforloanandtheinterestrate

WheretoBorrow

•  Consumerfinancecompanies

•  Financialinstitutions•  Insurancecompanies•  Loansharks •  Pawnbrokers •  Paydayloans •  Privateloans

VehicleLoans

Consider:•  Interestrate•  Monthlypayments•  Lengthoftheloan•  Downpaymentortrade-in•  Balloonpaymentclauseoraccelerationclause

ResearchingCarPurchase

•  ConsumerReports•  CarandDriver•  www.edmunds.com•  www.kbb.com•  Carfax

Depreciation

•  Newcarloses20%ofitsvalueimmediately.•  Mostofacar’sdepreciationoccursinthefirsttwoyears.

LeasingAdvantages

•  Lowermonthlypayments•  Candriveamoreexpensivecar•  Driveanewcarevery2to3years(tendstobemorereliable)

LeasingDisadvantages

•  Mileagelimit•  Moreexpensive•  Finesfordingsordents•  Neveractuallyownthecar

UnitReview1.  Discusswhatcreditis,itsbenefits,and

potentialproblems.2.  Howdoesapersonbeginestablishinga

creditrecord?3.  Describewhatcanbedonetoestablisha

goodcreditrecord.4.  Namethethreemajorcreditbureaus.

UnitReview-Continued5.  Whyisitimportanttoreviewcopiesofyour

creditrecord,andisthereanythingthatcanbedoneifacreditreporthaserroneousinformation?

6.  Describetherelationshipofcreditbureauswithlendersandcreditors.

7.  DescribethefourC’sofcredit.

UnitReview-Continued8.  Whatisthemostcommonlyusedcredit

score,andhowisitcompiled?9.  ExplaintherelationshipofFICOscoresand

interestrates.10.  Describeatypicalvehicleloan.11. Compareandcontrastthevarioussourcesof

loans.

UnitReview-Continued12.  Discussthefactorsthatshouldbeconsidered

whenshoppingforavehicleloan.13.  Wherecanyoufindimpartialinformation

aboutmakesandmodelsofvehicles?14.  Discussinformationthatcanberesearched

whenshoppingforacar.15.  Howarenewvehiclesaffectedby

depreciation?

UnitReview-Continued16.  Howdousedvehiclesaffectdepreciation

andwhatareotherconsiderationswhenpurchasingausedvehicle?

17.  Discusstheadvantagesanddisadvantagesofleasingavehicle.