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Borrowing Basics 1
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
