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CH 5: Financial Institutions
Transcript of CH 5: Financial Institutions
Main function: making loans to consumers and small businesses. These loans have short and intermediate terms with higher rates than other lenders charge.
Examples: Kabbage.com or Synchrony.com
Organized primarily to provide loans to purchase homes.
Federal Deposit Insurance Corporation (FDIC)
FDIC insurance covers all deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Should be used for: Checking, savings, and money market accounts, and Certificates of Deposit (CDs).
: Investments (stocks, bonds, annuities, any investment that is not a deposit)
Other Financial Institutions
Life Insurance Companies:
Provide financial security for dependents. However, many life insurance policies also contain savings and investment features.
Also referred as mutual fund companies. Common: Money Market Fund. This is a combination savings-investment plan in which the company uses your money to purchase a variety of short term financial instruments. Not covered by Federal Deposit Insurance. Provides convenience of liquidity.
Rent to own centers:
stores that lease products to consumers that can own the item after completing the number of monthly or weekly payments. High Interest Rates.
Types of Financial Institutions
1) Deposit Institutions:
Organized as corporations, with individual investors (stockholders) contributing capital.
Savings and Loans Associations (S&L)
, Savings and mortgage loans.
Mutual Savings Banks
(owned by depositors). Savings and mortgage loans.
User owned, non profit. Traditionally credit unit members shared a common bond but restrictions have loosen over time.
"You generally hear that what a man doesn't
know does not hurt him, but in business....
what he doesn't know does hurt." E.S.Lewis
High-Cost Financial Services
Loan money on tangible possessions such as jewelry or other items. Loans usually $50-$75 to be repaid in 30-45 days. They sell items not redeemed. Charge 3% interest on loans.
Check Cashing Outlets:
Most financial institutions will not cash a check unless the person has a bank account. Charges are 1-20% of the face value of the check. (ie. local Grocery stores) Average 2-3%
Pay Day Loans:
Are typically marketed to bridge a cash flow shortage between pay or benefits checks. Also referred as cash advances, check advance loans, and delayed deposit funds. 780% interest rate.
First, if you take out a payday loan, you will likely be charged a fee of between $10 and $30 for every $100 borrowed.
A $15 per $100 fee is typical. So, if you have an emergency and need $300 today, you would have to pay back $345 in a couple of weeks, assuming a fee of $15 per $100 borrowed. If your budget is already tight, that may be hard to do. The payday lender may encourage you to pay just the fee and extend the loan another few weeks. In that case, you would spend $45 and still owe $345 when the extension is over – that means you’re spending $90 to borrow $300 for one month.
Refund Anticipation Loans:
You are paying to borrow your own money!. Get your tax refund immediately when in fact you are taking out a loan- usually very high interest rate, usually more than 100%.
Auto Title Loans:
The car title secures the loan. These loans are usually for 30 days or less. Interest high (several hundred percent) and if not paid, lender can sell car.
How do you calculate (three things you need to know?
1) Amount financed ($350)
2) Finance Charge ( $50)
3) Term of the loan (14 days)
50/350 = 0.142857
0.142857 x 365 = 52.142857
52.142857/14 days = 3.7244897 x 100 =