Borrowing basics - notes PDF

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Credit - Ability to borrow money now, and pay it back later … plus interest Interest - Promise to pay back money plus borrowed extra Loan -

Money that you borrow from a lender and promise to pay it back on a set schedule

WHY IS CREDIT IMPORTANT? - Useful in emergencies - More convenient than carrying cash - Allows you to make large purchases and pay it off over time - Is the record how you manage your ability to obtain employment, housing, and insurance

Collateral - Something you provide the lender to secre a loan - If you dont pay off loan, lender can take thing and sell it to pay your loan Guarantee - Form of collertal - Cosigner…. If you dont pay off the loan… cosigner has to

Secured loan - Borrower pledges (gives) collateral to lender for a loan Unsecured - Is not back by a collateral - Student loans or credit cards

Assets - Something valuable that you own …. Like a car, savings account, or property - Kitchenware, clothing, furniture for your home Consumer installment loans - Used for purchases and other things for you and your family - Ex. car loan Credit cards - Give you the ongoing ability to borrow money - Buy things and pay for them later

Home Loans Home purchase - Purpose of buying the home - You could lose your house if you do not repay your loan as agreed Home refinancing - Replaces an existing home loan by paying it in full and replacing it with a new home loan - Cash out refinance loan = allows you to borrow more mkoney than is owed on the loan being replaced - Reasons to do it …. - Lower interest rate - Get repairs on house - Investment Home Equity - EQUITY: value of your home minus what you owe

Fees -

Late fee

Interest - Amount of money the bank charges yu for using their money Fixed rate - Stays the same throughout the term of the loan Variable loan - Might change during loan term - Loan agreement will show the details of the rate changes

State charges in a clear and uniform behavior… so you can see which is the loan Closed end loan - Annual Percentage rate (APR) - Amount financed - Finance charge - Fees - Total of the payment Potentially costly alternatives - Rent to own services

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Payday loan services Refund anticipation services

Short term loans - Pawn shops - Car title lenders (loan secured by the borrower’s car) - Payday lenders (for unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment) Comparison shop - Total cost and APR

The 4 C’s 1. Capacity: present and future ability to meet your payments a. do you make enough money to pay the loan every month??? i. How long have you been employed ii. How much money do you make a month iii. What are monthly expenses 2. Capital: value of your assets and your net worth a. Value of your assets and net worth i. How much money do you have in checking and savings ii. Do you own a house iii. Do you have investments in other assets 3. Character: how you have paid your bills or debit in the past i. Have you had credit in your past ii. How many credit accounts do you have? 4. collateral : refers to property or assets offered to secure the loan

Guard against predatory lending practices - Deal with reputable loan providers - Shop around - Read and understand - Ensure you can afford all payments

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Question 1 ●

0 out of 10 points

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● A tax refund anticipation loan is a great way to get your refund money now instead of waiting several weeks for the government to send you your check. ●

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Selected Answer:●

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True True False

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Response● Feedback:

No...Tax refund anticipation loans are short-term loans that you can obtain from the company or software publisher that prepares or files your tax return. These typically come with lots of fees that can make the costs of this loan quite expensive. These costs might include: tax preparation fee, loan application fee, electronic filing fee, document handling fee, etc. That adds up and makes for a costly loan!!!

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Question 2 ●

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10 out of 10 points

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Which of the following is NOT true of Rent-to-Own credit services?

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Selected● Answer: ●

D.

The item belongs to you while you make the payments, and if you miss a payment, you can get back the money you've already paid by returning the item to the store.

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A.

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B.

Once a certain number of payments have been made, you own the item.

You can use an item, like a 54-inch plasma television, for a period of time by making weekly or monthly payments.

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C.

There is no interest, but the cash price for the item plus the payments you make through an agreement usually add up to more than the cost of a bank loan (loan amount plus interest and fees). D.

The item belongs to you while you make the payments, and if you miss a payment, you can get back the money you've already paid by returning the item to the store.

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Response● Feedback:

Yes...The item actually belongs to the store while you make payments, and if you miss a payment, the store can take the item back (repossession), and you don't get any money back.

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Question 3 ●

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0 out of 10 points

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Most loans require you to offer the bank some form of collateral. Which of ● the following cannot be used as collateral?

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Selected Answer: ●

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Savings Accounts

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Automobile B.

Furniture

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C.

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D.

Savings Accounts Home

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Response● Feedback:

No...Necessary household items such as furniture, clothing, dishes, etc. cannot be used as collateral. The bank accepts items that it believes can be easily sold

to repay the loan if you do not repay the loan yourself. ● ●

Question 4 ●

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10 out of 10 points

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A loan is going to cost you more money than just the price of the items ● you're buying.

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Selected Answer:●

True

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True

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False

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Response● Feedback:

Yes...In addition to paying back the money that was loaned to you, you will have to pay interest and (likely) fees.

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Question 5 ●

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10 out of 10 points

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The interest rate is more important to consider than the annual percentage ● ● rate (APR) when shopping for a loan. ●

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Selected Answer:●

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False True False

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Response ● Feedback:

Yes...The APR includes the interest rate and other charges or fees to reflect the total cost of your loan.

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Question 6

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10 out of 10 points

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Which of the following is NOT true about interest on a loan?

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Selected● Answer: ●

C.

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Interest is the amount of money the bank pays you so you can use its money.

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Interest is a percentage/proportion of your loan amount. Interest is determined by the type of loan and the length of the loan. C.

Interest is the amount of money the bank pays you so you can use its money. D.

Interest is either fixed rate (stays the same throughout the length of the loan) or variable rate (may change during the period of the loan).

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Response ● Feedback:

Yes...Interest is the amount of money the bank CHARGES you for letting you use its money.

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Question 7 ●

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10 out of 10 points

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You can obtain a free annual credit report by contacting http://www.annualcreditreport.com/

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Selected Answer:●

True

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True

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False

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Res ● pons e Fee dbac k:●

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Question 8 ●

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10 out of 10 points

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When you apply for credit, the lender will review the "Four C's" to decide● whether you are a good credit risk, or in other words, whether you are likely to pay back the loan. Which of the following is NOT one of the "Four C's"?

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Selected Answer:

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B.

Clarity (are you mentally stable enough to manage your own finances) A.

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Capital (the value of your assets and your net worth) B.

Clarity (are you mentally stable enough to manage your own finances) C.

Character (how you have paid your bills or debts in the past) D.

Capacity (your present and future ability to make your payments) E.

Collateral (the property or assets offered to secure the loan)

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Response Feedback:

Yes...The "Four C's" are Capacity, Capital, Character, and Collateral.

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Question 9 ●

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10 out of 10 points

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When considering applying for some form of credit and reviewing various ● Disclosure Statements, which of the following questions is typically NOT a part of that consideration? ●

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Selected Answer: ● ●

Is Overdraft Protection offered?

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A.

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D.

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Can I afford the monthly payments? What is the Annual Percentage Rate (APR)? What is the total cost of credit? Are there any fees?

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E.

Is Overdraft Protection offered?

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Response Feedback:

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Yes...Overdraft Protection is offered on checking accounts, not on credit accounts.

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Question 10

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10 out of 10 points

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Credit can be used to purchase a house.

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Selected Answer:●

True

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True

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False

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Response Feedback: ●

Yes...A home loan (mortgage) is a form of credit.

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Which of the following is NOT true about Personal Loans? ●

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Selected Answer:

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Personal Loans are unsecured loans that you use for short-term needs.

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You usually don't have collateral on a Personal Loan.

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Personal Loans are fairly safe for the banks to make, so there is usually a really low interest rate. A.

B.

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Personal Loans are fairly safe for the banks to make, so there is usually a really low interest rate. D.

Personal Loans can be used to buy a computer or to cover vacation costs.

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Respons ● e Feedbac k:

Yes...Because there is no collateral on the loan, a Personal Loan is riskier for the bank to make because it has no way of recovering any of the money it loses if you don't repay the loan. Thus, it is usually difficult to obtain a personal loan from a bank.

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Question 2 ●

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Which of the following is NOT considered when the bank evaluates your loan application? ●

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Selected Answer:

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Your high school or college transcript

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Your high school or college transcript

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Your employment status and your ability to make payments now and in the future

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Your credit history report

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Your savings or other assets

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Response Feedback:

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Question 3

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Yes...Loan officers don't typically ask to review your transcripts.

10 out of 10 points

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A loan is going to cost you more money than just the price of the items ● you're buying.

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10 out of 10 points

Selected Answer:

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True

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Respons ● e Feedbac k:

Yes...In addition to paying back the money that was loaned to you, you will have to pay interest and (likely) fees.

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Question 4 ●

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Most loans require you to offer the bank some form of collateral. Which of the following cannot be used as collateral? ●

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Selected Answer:

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Answers:

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D.

Furniture Automobile Home Savings Accounts D.

Furniture

10 out of 10 points

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Respons ● e Feedbac k:

Yes...Necessary household items such as furniture, clothing, dishes, etc. cannot be used as collateral. The bank accepts items that it believes can be easily sold to repay the loan if you do not repay the loan yourself.

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Question 5 ●

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Which of the following is NOT true about credit? ●

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Selected Answer:

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Credit is extra money.

Answers:

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Credit is extra money.

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10 out of 10 points

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A.

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Credit allows you to make large purchases such as a car or a house.

Credit can be useful in an emergency. Credit is sometimes more convenient than cash. Credit is a loan.

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Response Feedback:

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Yes...Credit is NOT extra money...it is a loan that you must pay back.

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Question 6 ●

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10 out of 10 points

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When considering applying for some form of credit and reviewing various Disclosure Statements, which of the following questions is typically NOT a part of that consideration? ●

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Selected Answer:

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Is Overdraft Protection offered?

Answers:

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Is Overdraft Protection offered?

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A.

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Are there any fees? Can I afford the monthly payments? What is the total cost of credit? What is the Annual Percentage Rate (APR)?

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Response Feedback:

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Yes...Overdraft Protection is offered on checking accounts, not on credit accounts.

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Question 7 ●

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Trying to get a loan from a bank is time consuming and invades the privacy of your personal credit history; thus, you'd be better off using alternative credit arrangements such as refund anticipation loans, payday loans, or rent-to-own services. ●

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Selected Answer:

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Fals e True

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10 out of 10 points

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Respons ● e Feedbac k:

Yes...Even if these alternatives seem better on the surface, once all of the fees and interest are included, they will usually end up costing you much more than a traditional bank loan. In addition, banks are federally regulated and insured, and the consumer protections that bank loans carry are standard and are generally not available in alternative loan arrangements.

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Question 8 ●

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A tax refund anticipation loan is a great way to get your refund money now instead of waiting several weeks for the government to send you your check. ●

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Selected Answer:

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Answers:

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Fals e True

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Respons ● e Feedbac k:

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Question 9

Yes...Tax re...