Borrowing Basics 1

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Introduction

• Instructor and student introductions

• Module overview

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Student Introductions

• Your name

• Expectations, questions, and concerns about borrowing money

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Purpose

Borrowing Basics:

• Describes how credit works and the types of credit available.

• Helps you determine if you are ready to apply for credit.

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Objectives

By the end of this course, you will be able to:

• Define credit.

• Explain why credit is important.

• Distinguish between secured and unsecured loans.

• Identify three types of loans.

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Objectives (Continued)

• Identify the costs associated with getting a loan.

• Explain why it is important to be wary of rent-to-own, pay-day loan, and refund anticipation services.

• Determine if you are ready to apply for credit.

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Agenda and Ground Rules

• 60 – 90 minutes long

• One 10-minute break

• Training methods

• Class participation

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Credit

• Credit is money you borrow to pay for things.

• It is also called a loan.

• “Good” credit means making payments on time.

• “Bad” credit means it will be harder to borrow in the future.

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Why Credit Is Important

• It can be useful in emergencies.

• It’s more convenient than carrying cash.

• It lets you make large purchases.

• It can affect your ability to get employment, housing, and insurance.

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Collateral

Property or another asset you promise to give to the bank if you can’t repay your loan.

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Collateral Items

Car Property

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Types of Loans

• Consumer installment loans

• Credit cards

• Home loans

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Consumer Installment Loan

A loan used to pay for personal expenses:

• Automobile

• Computer

• Furniture

• College tuition

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Credit Cards

Give you the ongoing ability to borrow money for:

• Household,

• Family, and

• Personal needs.

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Home Loans

• Home purchase loans

• Home refinance loans

• Home equity loans

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Practice Exercise – Types of Loans

Instructions:

• Read the description of the purchase to be made.

• Fill in the blank with the name of the most appropriate loan type for that purchase.

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The Cost of Credit

• Fees

• Interest

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Fees

• Annual maintenance fees

• Service charges

• Late fees

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Interest

The money financial institutions charge for letting you use their money.

The rate of interest is either:

• Fixed

• Variable

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How Much Does Credit REALLY Cost?

• Amount financed $5,000.00

• APR 12%

• Finance charge $600.00

• Total paid $5,600.00

Watch out for “penalty APRs” and “universal default” on credit cards.

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Practice Exercise – Borrowing Money Responsibly

Instructions:

• Read each question carefully.

• Answer the question.

• Be ready to support your answer.

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The True Cost of Alternative Financial Services

• Rent-to-own services

• Pay-day loan services

• Refund anticipation services

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Rent-to-Own Services

• You use the item by making monthly or weekly payments.

• The store owns the item until you make your final payment.

• Using rent-to-own services is more expensive than getting a consumer installment loan.

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Pay-Day Loans

Loans that:• Are made for a fee to people who need

money right away.• Are paid back with the borrower’s next

paycheck.• Are renewed for an additional fee if not

paid off in the agreed-on time period.• Should be used only for emergencies.

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Refund Anticipation Loans

• These short-term loans are secured by your income tax refund.

• The money for the loans comes from a bank or finance company.

• They are more costly than you might think.

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The “Four Cs” of Credit Decision Making

• Capacity

• Capital

• Character

• Collateral