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Borrowing

Unit 2
by

Brent Shibla

on 15 October 2015

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Transcript of Borrowing

Borrowing
and Credit

Using Credit

When is it ok to borrow money?
Borrow to pay for:
school
a home
an emergency
starting a business
something long term with low interest rates

When is it not ok to borrow?
Don’t borrow when already in severe debt.
Don’t borrow for short-term things such as vacations, or fancy dinners.
Don't borrow if you don't know when you can pay it back!
Credit
Being able to buy something now and pay for it later.

Consumers Spend
More Money
Demand for products and services rises

Companies spend more and hire more employees

Employees
earn more money

Credit Options
•Revolving credit
(example: credit card)
–Borrow for multiple purchases without going over credit limit
–Repay what is owed each month
•Installment credit

(example: car loan)
–Borrow a specific amount of money to buy something now
–Make regular payments to repay over time by a set date
•Cash loans
–Borrow a specific amount of cash to repay later by a set date
•Service credit
(example: cellphone, electricity)
–Promise to pay for services used each month

Now or Later?
•Instant Gratification
– Trip to Florida
An unwillingness to give up something now in
return for something later
•Delayed Gratification
- Skipping trip to buy car
A willingness to give up something now in return for something later

Stop, Drop and Think Before Using Credit
• Do I need this or do I want this?
• If I don’t need it, why do I want it?
• Exactly when will I use it?
• Can I find it for less somewhere else?
• *What will I have to give up or put off by using credit to buy this now?

Credit Costs
2-2
The Language of Credit

Principal $
The original amount of money saved, invested or bought using credit before interest or fees are added.
Interest %
What the lender charges for using credit usually a percentage of the principal.

Jesse’s brother had a flat tire on his car, but he didn’t have the money on hand to buy a new tire that day.
He was able to purchase a new tire by arranging to repay the $150 owed (principal) for the tire plus 10 percent (interest) in 30 days.



Simple Interest Formula
Calculate a lump sum to be prepaid on a due date.

Interest = Principal x Interest Rate x Time
(in dollars) (in dollars) (as decimal) (no. of years)

$1.25 = $150 x .10 x 1/12

Don't Pay The Minimum Each Month!
You bought “stuff” with your credit card.
In fact, you bought $500 worth of “stuff” with your credit card.
Your APR is 18 percent.
You plan to pay $10 a month to pay it off (Minimum).

You will pay
$431
in interest.
Final cost of your purchases =
$931.40

It will take seven years and nine months to
pay off balance.
Annual Percentage Rate
Consistent way to report interest; includes interest
rate, fees and loan costs.
APR Formula: APR= 2 x n x f
P (N + 1)
n = number of payment periods in one year
f = finance charge
P= principal or amount borrowed
N= total number of payments to pay off amount borrowed
Maturity Date

When the final payment is due for a loan.
Grace Period
The amount of time before interest starts accumulating on charge purchases if payment is not received.
Debtor
A person who borrows money from others, in which the money, called debt, must be repaid.
Creditor
A person or business that loans money to others.
They charge money for this service in the form of interest and fees.
Capital
A person's financial position is based on capital.
Capital is the value of property you possess (Bank accounts, investments, real estate and other assets) after deducting your debts.

2-3
Credit Reporting
A history of how you have used credit:
• Where you live and work
• Credit account amounts (balances and limits)
• Payment history (on time or late)
• Recent inquiries from creditors
• Any collection or legal action to collect debt

Who’s Watching?
Credit Reporting Agencies:
• Equifax
• Transunion
• Experion
Also:
Credit card providers, lenders, banks, landlords, employers, insurance companies.

For example:

An auto dealer will request a credit report when someone applies for an auto loan to buy a car. Or a landlord might look at a credit report before deciding whether or not to rent out an apartment to someone.
This is what most credit applications look like...
2-4 Credit
Rights and
Responsibilities
What do you think? Is credit good or bad?
Contract
Legal arrangement that two parties agree to uphold
Follow through with the
contract or risk this...
Follow through with contract or risk this…
• Embarrassment if card is declined at the checkout
• Having property repossessed
• State of perpetual debt which can increase personal stress
• Paying higher interest rates and/or late fees
• Negative details for others to see on your credit report
• Having your wages garnished
• Contact with a collection agency
• Unplanned expenses for legal action to enforce the contract

Ignorance Is No Excuse
Read the fine print:
• Payment amount
• Payment due date(s)
• Consequences of late or no payments:
– Payment penalties? Collection costs? Repossession of property?
• Any insurance coverage requirements (i.e. car, apt)
• How to notify about changes to personal information
• What to do if you have problems with the arrangement
Pay Attention To Updates!

Total Debt
20% of your annual net income.

Monthly Debt
10% of your monthly net income.
If someone asked you for two tips about using credit, what would you
say?
What is the diffference between "Gross" and "Net" income?
Gross Income
The total amount of money earned for a job within a certain time frame.
Salary per year, Hourly wage, etc.


Net Income
Amount of money received after taxes and other deductions are taken out of the gross income.
Your income after federal and state taxes, health insurance, 401k, etc.
Identity Fraud
2-5
What's in your wallet?
Give yourself a point for each of these items listed below.
__ Credit card (The actual number of cards)
__ ID card with photo (school, employment)
__ $5 bill
__ Change (coins) totaling $2 or more
__ Original Social Security card
__ Picture of a close relative
__ Computer password (The actual number of passwords)
__ Bank/Credit Union ATM PIN number
__ Library card

__ Paycheck stub
__ Bank or credit union deposit slip
__ Any type of money-saving coupon
__ Car keys
__ Flash drive for computer
__ Cell phone
__ Driver’s license
__ Kleenex
__ Membership card
__ Food

Difference Between Identity Theft and Fraud?
Identity Theft
Identify Fraud
Identification is stolen and the
person acts as if they were you.
Includes use of license, passport and
other documents proving ID.

Your account information is used for purchases.
New accounts are opened or insurance purchased using your information.
Information is used to commit crimes.
Take out your phones and look up these questions....
What percentage of identity fraud crimes were committed by someone the victim knew?
What are the five most common types of identity theft?

Protect Yourself From Fraud
7 Tips To Thwart Thieves
Keep sensitive information close to the vest.
Lighten up your wallet.
Never leave blanks on a charge slip.
Stick to secure web pages.
Shred ruthlessly.
Be computer safe by using firewalls, anti-spyware and anti-virus software.
Guard your Smartphone too!

Write a checklist of 5 things you can do to prevent identity fraud against you.
Compounding Interest
Interest calculated on the initial principal (original amount) and also on the accumulated interest of previous periods of a deposit or loan.
Think of it as "interest on interest."
It keeps "compounding" or adding on to the original amount or "principal."
Usually for a specified period of years.

Formula:



Compounding Interest Formula
F= Future value
PV=Present value
r= The annual rate of interest
as a decimal.
n=The number of times per year the interest is compounded (monthly or annually).
t: The number of years you leave it invested.

Hidden Costs of Credit
Annual Fee
The fee a credit card company charges for use of their credit card.
Credit Limit
The maximum amount of money the lender is willing to loan and applicant.
Finance Charge
The total cost of using credit including interest and fees.
Origination Fee
The charge for setting up a loan.
Loan Term
Length of time you have to pay for a loan.
The longer the loan, the lower your monthly payment, but the greater interest paid.
Introductory Rate
Lower interest rate offered by credit card companies, usually for a short period of time, to influence you to sing up for credit with them.
Do you think this great low introductory rate lasts forever?
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