Loans
Jan 03, 2016
Loans
Loan
An amount of money borrowed and repaid with interest
Interest – Money paid for the right to borrow money Fixed rate – rate that stays the same Variable rate – rate that can change over the course of
the loan
Credit Report
Report detailing your credit history, including payments related to bills, loans, and credit accounts and bankruptcies.
Are you certain you can repay the money When will you be able to repay What is a fair interest rate
Credit Rating
A ranking, typically expressed as a number or letter, based on credit history and used by financial institutions for loan and credit approval.
Annual Percentage Rate (APR)
Yearly rate of interest
Multiply the monthly rate X 12 = APRDivide the APR/ 12 = Monthly rate
Personal Loan Example
You borrow money from a friend that has the same policies as a bank. They loan you $300 dollars with an APR of 24 %.
You have a part time job making $200 dollars per month
You will pay $50 repayment each month
Personal Loan Example
You borrow money from a friend that has the same policies as a bank. They loan you $500 dollars with an APR of 15%.
You have a part time job making $300 dollars per month
You will pay $75 repayment each month
Personal Loan
Interest rate = APR/12
Beginning Balance = amt of loan or previous month ending balance
Interest charge = Beginning balance X Interest rate
Principle Payment= Amount of money paid on Loan Principle Payment= Monthly payment-Interest charge
Principle = what is owed
Ending Balance = Beginning Balance + Interest Charge – Loan Repayment
Truth in Lending Act
Requires the lenders to explain how they compute loan charges and list the APR
Also gives the borrower three business days to opt out of the loan
Loan Sharks
Individuals who charge very high interest rates on loans
Payday Loan
Short term, high interest loan
FINANCING AND PURCHASING A HOUSE
Buying A Home
Home Loans
For most, a home is the most important financial asset
A home is one of the biggest investments a person will make.
Home Loans
Homes are expensive and usually are not paid for all at once.
Most buyers turn to banks, credit unions, or finance companies to get a mortgage to purchase their home
Mortgage
A loan used to purchase a home
Down Payment
The amount of money a buyer pays in cash for the purchase of a house up front.
Depending on buyer qualifications, amount can range from 5% to 20%
20% is common
Home Mortgage
A large amount of money usually cannot be paid back quickly.
Instead, pay back small amounts each month Plus interest.
Home loans are considered long-term loans 15-year 30-year
Home Mortgage
Banks will charge interest on the mortgage APR
Part of the monthly payments will cover interest charges
The remaining payment goes to reduce the principle.
Principle – the remaining amount owed
Home Mortgage
Interest rate on mortgage will be based on: Borrowers credit rating Length of loan Down payment amount
Home Mortgage
A longer the life of the loan, the smaller the monthly payments More interest is paid over time
The shorter the life of the loan, the larger the monthly payments Equity in the home is built faster
Home Mortgage
Equity – The difference between the homes market value and the remaining balance of the mortgage
Equity = MKT value – Remaining loan balance
Home Mortgage
Amortization Schedule – A schedule for repaying the loan
An amortization schedule will show: Month Interest Rate Beginning Balance Interest Charge Loan Payment Principle Payment Ending Loan Balance for the month
Home Mortgage
Interest rate = APR / 12Beginning Balance
Interest Charge = Beginning Balance X Interest Rate
Loan Pmt = GIVEN, same each month
Principle Pmt = Loan Pmt – Interest Charge
Ending Balance = Begin Balance – Principle PMT
Other costs of Home Loans
Closing Costs – Fees paid in addition to the cost of the home
Prepayment Penalties – fees designed to keep the borrower from paying the loan off early
Refinancing
Refinancing – Paying off the original loan by taking out a new loan against the remaining loan balance
Foreclosure
When borrowers are unable to pay their loans on time, they are delinquent. Delinquent – Past due on a scheduled loan payment
Foreclosure – legal process that allows a lender to take back ownership of the property if the loan is not paid
Auto Loans
Auto Loans
A car loan will probably be the second largest purchase in a lifetime, next to a house.
Many people trade in their old car.
The old car is not worth a new car, but still has value.
Auto Loans
Trade-in Value – The amount the dealer gives you for your old car as partial payment for the car you want to purchase
Auto Loans
Many times, the trade-in value is called the Book Value
Book value – How much a car is worth based on condition, mileage, and other factors Kelly Blue Book
Auto Loans
New car dealers sometimes offer incentives to encourage people to buy.
Incentives – Factors designed to encourage people to purchase a vehicle.
Incentives can be: Special finance rates Rebates Other offers
New vs. Pre-owned Cars
New Cars New cars offer the latest in technology, features, and
design, and usually come with a warranty
New cars also cost more and lose some value immediately
New vs. Pre-owned Cars
Used Cars Less expensive May lack certain features you are seeking May not be in the best shape May have high mileage May have limited items covered by the warranty May have a history of repair problems
New vs. Pre-owned Cars
When considering which to buy, all factors must be considered, along with what you can comfortably afford.
Hidden Costs in Autos
Paying for the car is only part of the cost
Additional Hidden Costs: Insurance Premiums Maintenance Costs Repair Costs Cost of Gasoline Taxes and Licensing Fees
Lease vs. Purchase
Lease – Paying only a portion of the vehicles sales price and returning it to the dealer at the end of the specified time.
Purchase – Paying the cars full price and keeping in as long as you want
Lease vs. Purchase
Lease – Pros Usually little or no down payment required Fewer up-front, out of pocket fees Lower monthly payments New car every few years No chance of being “upside down” in the loan Allows you to have a more expensive car Some dealers will cover regular maintenance
Lease vs. Purchase
Lease – Cons You always have a car payment You will never own the car Mileage restrictions Higher insurance coverage costs Charges for excess wear and tear Higher credit score requirements Typically, you must be 18 or older to lease
Lease vs. Purchase
Purchase – Pros You own the car after you make all the payments Can own the car as long as you want Can drive as many miles as you want Insurance costs are usually lower
Lease vs. Purchase
Purchase – Cons Down payment required Up-front, out of pocket costs Higher monthly payments Can end up “Upside down” Loan limits for the price of the vehicle Have to pay for vehicle maintenance