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

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

• When

• How often

• How much

THE TASK OF DETERMINING: 7.

The debt limit most people establish for themselves is lower than what lenders would be willing to lend.

Establishing a Debt Limit 8.

Debt-payments-to-disposable-income method

Ratio of debt-to-equity method

Continuous-debt method

Establishing a Debt Limit 9. Credit Capacity Indicators * Not including housing 6-9 Debt Payments-to-Income Ratio monthly payments * monthly after tax income 10. Credit Capacity Indicators Debt To Equity Ratio total liabilities net worth * = Should be < 1 *Excluding home value 6-10 11. Debt-Payment Limits as a Percentage of Disposable Income * Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives. No, borrower should see a credit counselor. Overextended; borrower worries about debt 21 to 25 Only the fearless or foolhardy ask for more. Fully extended; borrower hopes that no emergency arises. 16 to 20 Should not be undertaken. Possibly safe limit; borrower feels some pressure. 11 to 15 Could be undertaken cautiously. Safe limit; borrower feels little debt pressure. 10 or less Take on Additional Debt? For Current Debt* Percent 12.

If one of the earners reduces/eliminates earnings, debts that had been manageable with two incomes may become overwhelming.

Setting Debt Limits for Dual-Earner Households BEWARE! 13.

Installment loans

Secured/unsecured loans

Purchase loan installment contracts

The Language of Consumer Loans 14. Monthly Installment Payments (Principal and Interest) Monthly Installment Payment (Principal and Interest) Required to Repay $1,000* *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 $290.43 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. 26.49 25.39 24.32 23.27 22.24 21.25 20.28 19.33 18.42 5 years (60 months) 30.43 29.37 28.34 27.33 26.33 25.36 24.41 23.49 22.58 4 years (48 months) 37.16 36.15 35.16 34.18 33.21 32.27 31.34 30.42 29.52 3 years (36 months) 50.90 49.92 48.96 48.01 47.07 46.14 45.23 44.32 43.42 2 years (24 months) 92.63 91.68 90.73 89.79 88.85 87.92 86.99 86.07 85.15 1 year (12 months) 20% 18% 16% 14% 12% 10% 8% 6% 4% Terms ofInstallment 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

Simple-interest method

Discount method

APR CALCULATIONS FOR SINGLE-PAYMENT LOANS: 18.

Simple-interest method

Add-on method

Discount method

Calculating Finance Charges and APR APR CALCULATIONS FOR INSTALLMENT LOANS: 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. Fair Debt Collection Practices Act

Cant be abusive or threaten

Cant call you at work if you say no

Cant tell boss and friends

Cant call you at odd hours

Must follow set procedures

The act does not apply to creditors that try and collect the debt themselves

Collection agencies... 23. Impact of Divorce on Credit

Pay attention to accounts held jointly

Ask creditors to close joint accounts

Remember, creditors can legally collectfrom either party

Get updated copy of credit report

24. Alternative Lenders

Pawnshop

Rent-to-own program

Check cashers

Rapid refund services

25. 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. 26. 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.