Chapter 7: Planned Borrowing

1
Chapter 7 Planned Borrowing
2
Objectives

• Discuss the elements of the planned use of
  credit.
• Establish your own debt limit.
• Understand the language of consumer loans.
• Describe the sources of consumer loans.

3
Objectives

• Calculate the APR and finance charges on both
  single-payment and installment loans.
• Recognize signs of over-indebtedness, know what
  to do when it occurs, and explain your rights
  regarding credit collection and bankruptcy.

4
Planned Borrowing

• Most people use installment credit 12 times
  during their life.
• Yet, only 13 shop for credit terms!

DID YOU KNOW!
5
Planned Borrowing

• A knowing decision to borrow to finance a
  purchase or simply to borrow cash.

6
Planning Your Credit Usage

• When
• How often
• How much

THE TASK OF DETERMINING
7
Establishing a Debt Limit

• The debt limit most people establish for
  themselves is lower than what lenders would be
  willing to lend.

8
Establishing a Debt Limit

• Debt-payments-to-disposable-income method
• Ratio of debt-to-equity method
• Continuous-debt method

9
Credit Capacity Indicators
Not including housing
6-9
10
Credit Capacity Indicators
Debt To Equity Ratio
total liabilities

Should be lt 1
net worth
Excluding home value
6-10
11
Debt-Payment Limits as a Percentage of Disposable
Income
Excluding home mortgage loans and convenience
credit to be repaid in full when the bill arrives.
12
Setting Debt Limits for Dual-Earner Households

• If one of the earners reduces/eliminates
  earnings, debts that had been manageable with two
  incomes may become overwhelming.

BEWARE!
13
The Language of Consumer Loans

• Installment loans
• Secured/unsecured loans
• Purchase loan installment contracts

14
Monthly Installment Payments (Principal and
Interest)
Monthly Installment Payment (Principal and
Interest) Required to Repay 1,000
To illustrate, assume you want to know how much
the monthly payment would be to finance a 9,000
loan at 10 for 3 years. To repay 1,000, the
figure is 32.27, multiply by 9 (for 9,000) to
determine that 290.43 is required for 36 months
of payments. When using amounts greater or less
than 1,000, convert using decimals. For
example, a loan of 950 at 10 percent for 3 years
would be calculated as follows 32.27 x 0.95
30.66.
15
Sources of Consumer Credit

• Parents and family members
• Commercial bank
• Credit union
• Life insurance company

• Savings and loan association
• Finance company
• Retailers
• Cash advances

16
Truth In Lending Rights

• The Truth In Lending Act requires creditors to
  provide you with accurate and complete credit
  costs and terms. APR

• Creditors must disclose
• credit terms and information...
• In a clear and conspicuous manner
• In a form you can keep

17
Calculating Finance Charges and APR

• Simple-interest method
• Discount method

APR CALCULATIONS FOR SINGLE-PAYMENT LOANS
18
Calculating Finance Charges and APR

• Simple-interest method
• Add-on method
• Discount method

APR CALCULATIONS FOR INSTALLMENT LOANS
19
Formula 7.3
20
Dealing With Over-indebtedness
TEN SIGNS OF OVER-INDEBTNESS

• Exceeding debt/credit limit.
• Running out of money.
• Paying only the minimum due.
• Requesting new cards and increases in credit
  limits.
• Paying late or skipping payments.
• Not knowing how much you owe.
• Taking add-on loans.
• Using debt consolidation.
• Receiving notice of repossession or foreclosure.
• Experiencing garnishment.

21
Dealing With Over-indebtedness

• Federal law regulates debt collection
• Bankruptcy as last resort
• Chapter 13
• Chapter 7

22
History of Bankruptcies Since 1961
23
Fair Debt Collection Practices Act
Collection agencies...

• Cant be abusive or threaten
• Cant call you at work if you say no
• Cant tell boss and friends
• Cant call you at odd hours
• Must follow set procedures
• The act does not apply to creditors thattry and
  collect the debt themselves

24
Impact ofDivorce on Credit

• Pay attention to accounts held jointly
• Ask creditors to close joint accounts
• Remember, creditors can legally collect from
  either party
• Get updated copy of credit report

25
Alternative Lenders

• Pawnshop
• Rent-to-own program
• Check cashers
• Rapid refund services

26
ManageOver-indebtedness
1. Determine what is owed. 2. Focus budget on
debt reduction. 3. Contact creditors. 4. Take
on no new credit. 5. Refinance. 6. Find good
help. 7. Avoid bad help.
27
Manage StudentLoan Debt
1. Choose most advantageous repayment
pattern allowed. 2. Consolidate student
loans. 3. Pay electronically. 4. Be punctual
with repayments. 5. Refinance with second
mortgage loan.