Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-1 Objectives Provide a background...

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 9-1

Objectives

• Provide a background on personal loans

• Outline the types of interest rates that are charged on personal loans

• Describe home equity loans

• Discuss car loans


Objectives (cont’d)

• Explain how to decide between financing the purchase of a car and leasing a car

• Describe the key features of student loans


Background on Personal Loans

• Usually obtained to finance a large purchase

• Has a specific repayment schedule

• Sources of loans Commercial banks, savings institutions,

finance companies, credit unions, some automobile manufacturers, friends, or family members


Background on Personal Loans (cont’d)

• The personal loan process Application process

•Personal balance sheet

•Personal cash flow statement

Loan contract: a contract that specifies the terms of a loan, as agreed to by the borrower and the lender•Amount of the loan

• Interest rate



Loan repayment schedule•Amortize: to repay the principal of a loan

through a series of equal payments

•Each payment includes part of the principal and part of the interest

Maturity: the life or duration of the loan•Longer maturity equals lower payments, but

more interest is paid over the life of the loan



Collateral: assets of a borrower that back a secured loan in the event that the borrower defaults•Secured loan: a loan that is backed or secured

by collateral •Unsecured loan: a loan that is not backed

by collateral•Payday loan: a short-term loan provided in

advance of a paycheck

Cosigning is sometimes required if credit history is weak



Financial Planning Online:Loan Request Online

• Go to: http://www.lendingtree.com

• This Web site provides a set of questions that you can answer to specify the type of loan that you desire. You will then receive up to four loan offers from various financial institutions within the next business day

http://www.lendingtree.com/



• Focus on Ethics: Predatory Lending Beware of illegal lending practices

• Lender charging high loan fees

• Lender provides home equity loan with the expectation of default so he can take ownership

• Lender ties other products to loan approval

• Lender includes balloon payment at end of loan

• Loan agreement includes confusing information

Shop around for best loan terms


Interest Rates on Personal Loans

• Annual percentage rate (APR): a rate that measures the finance expenses (including interest and other expenses) on a loan on an annualized basis

• Simple interest: interest on a loan computed as a percentage of the existing loan amount

• Add-on interest: a method of determining the monthly payment on a loan


Interest Rates on Personal Loans (cont’d)


Interest Rates on Personal Loans (cont’d)

• Simple interest: interest on a loan computed as a percentage of the existing loan amount (or principal) Size of payment depends on size of loan,

interest rate and maturity

The higher the interest rate, the higher the payment

The longer the maturity, the lower the payment



Home Equity Loan

• Home equity loan: a loan where the equity in a home serves as collateral for the loan

• Equity of a home: the market value of a home minus the debt owed on the home

• Credit limit on a home equity loan Limit based on equity invested Financial institutions usually loan up to 80% of the

equity in a home


Home Equity Loan (cont’d)

• Interest rate

Typically variable

Rate is usually tied to an interest rate index and adjusted periodically

Interest on most home equity loans is tax deductible


Car Loans

• Selecting the car—things to consider Personal preferences

Price

Condition

Insurance

Resale value

Repair expenses

Financing rate

Revised car loan contracts


Car Loans (cont’d)

• Negotiating the price Negotiating by phone may be beneficial

Trade-in tactics can be misleading

No-haggle dealers can save time and stress

Information is valuable–shop around

Purchasing a car online is possible, but not yet a streamlined process



• Negotiating the price Some dealers negotiate and some do not

Sticker price is manufacturer’s suggested retail price (MSRP)

Negotiating by phone•Call several dealers

Trade-in tactics•Attempt to negotiate price on new car first



No-haggle dealers• Make sure price is not higher than other dealers

The value of information• Use consumer magazines or Web sites

Purchasing a car online• Not as efficient as buying an airline ticket or a book

Financing decisions• Estimate dollar amount of monthly payment you can

afford before shopping


Financial Planning Online: Trade-In and Retail Value of Used Cars

• Go to: http://www.kbb.com

• This Web site provides trade-in and retail values for a used car, based on the condition of the car, its age, and other characteristics that you specify

http://www.kbb.com/


Financial Planning Online:Car Loan Interest Rate Quotation

• Go to: http://www.bankrate.com/brm/rate/auto_home.asp?link=8

• Click on: “Find the average rates in your city,” then proceed through steps to obtain average rates in your area

• This Web site provides a car loan interest rate quotation based on term of the loan and whether you wish to purchase a new or used car delineated by city and state

http://www.bankrate.com/brm/rate/auto_home.asp?link=8

http://www.bankrate.com/brm/rate/auto_home.asp?link=8






Financial Planning Online:Prevailing Car Loan Interest Rates

• Go to: http://biz.yahoo.com/b/r/a.html

• This Web site provides average car loan interest rates across the United States and in various states, which provide a useful benchmark for you to consider before obtaining a car loan

http://biz.yahoo.com/b/r/a.html


Financial Planning Online:What Is the Optimal Loan Maturity?

• Go to: http://www.bankrate.com/brm/auto-loan-calculator.asp

• This Web site provides a comparison of what your car loan payments will be depending on whether you obtain a loan with relatively short maturity or a loan with a longer term to maturity.

http://www.bankrate.com/brm/auto-loan-calculator.asp

http://www.bankrate.com/brm/auto-loan-calculator.asp


Purchase versus Lease Decision

• Leasing is a popular alternative to buying a car

• Advantages of leasing Lower down payment Just return the car at the end of the lease period

• Decision is highly dependent on the estimated market value of the car at the end of the lease period


Purchase versus Lease Decision (cont’d)

• Disadvantages of leasing You build no equity in the car

You are still responsible for maintenance and damages

Additional charges may be imposed•Too many miles

•Ending the lease before the specified period


Financial Planning Online:Should You Lease or Buy?

• Go to: http://www.bloomberg.com/analysis/calculators/leasebuy.html

• This Web site provides a comparison of the cost of leasing versus purchasing a car.

http://www.bloomberg.com/analysis/calculators/leasebuy.html

http://www.bloomberg.com/analysis/calculators/leasebuy.html

Exhibit 9.6 Stephanie’s Comparison of the Cost of Purchasing versus Leasing

Exhibit 9.6 Stephanie’s Comparison of the Cost of Purchasing versus Leasing (cont'd)


Student Loans

• Student loan: a loan provided to finance part of the expenses a student incurs while pursuing a degree

• Loan may be provided to either the student or the student’s parents

• Repayment typically deferred until student is out of school

• Interest may be tax deductible


How Personal Loans Fit within Your Financial Plan

• Key personal loan decisions for your financial plan are:

How much money can you afford to borrow

on a personal loan?

If you obtain a personal loan, should you pay it off early?


Integrating the Key Concepts

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