Responsibilities of Credit. Chapter 18

Responsibilities of Credit Chapter 18

Responsibilities of Consumer Credit To Yourself To Your Creditors Creditors to You

Loan Offer I (Mr. Vesper) will loan you $100.00 today if you agree to pay me $105.00 one year from today. Would you accept this loan offer? Why or why not?

Loan Offer I (Mr. Vesper) will loan you $100.00 today if you agree to pay me $120.00 one year from today. Would you accept this loan offer? Why or why not?

Loan Offer I (Mr. Vesper) will loan you $100.00 today if you agree to pay me $140.00 one year from today. Would you accept this loan offer? Why or why not?

Protecting Yourself From Credit Card Fraud Safeguarding Your Cards 1. Sign credit cards 2. Carry only cards you need 3. Keep a list of cards 4. Notify creditors immediately (if cards are lost or stolen) 5. Watch credit card during transaction 6. Shred any information that has your card # on it 7. Do not lend your card to anyone 8. Destroy expired cards (cut them up) 9. Don t give card # by phone to anyone you don t know or trust

Protecting Yourself From Credit Card Fraud Protecting Your Cards Online Deal with companies you know or trust Look for secure site symbol Review the privacy policy Look for BBB or TRUSTe symbols Avoid/ignore pop-up messages or emails asking for your personal info

Avoiding Unnecessary Credit Costs 1. Accept only amount of credit that you need 2. As your income increases, avoid spending more 3. Keep only 1 or 2 credit cards 4. Pay cash for small purchases (set your own limit i.e. under $25) 5. Pay balance due on credit card statements (not just minimum balance due) 6. Know the cost of borrowing 7. Shop for loans (interest rates, finance charges, etc.) 8. Time your credit card purchases 9. Take advantage of rebate programs

Why Do Credit Costs Vary?

Factors to Consider Affecting Costs Source of credit Bank, credit card, finance company, pawnbroker Total amount financed reduce loan amount by making a down payment Length of time you are making payments car loan term - 24 month, 36 month, 48 month, etc. Ability to repay the debt credit score Collateral or security offered assets that you can pledge Interest rates the lower the better

Types of Loans/Rates Fixed rate loans Interest does not change over the life of the loan Prime rate The interest rate charged to the best business customers

Computing Interest Amounts Simple Interest Interest computed on the amount borrowed Assumes one payment will be made at the end of the agreement Down Payment The part of the purchase price that is paid up front (not borrowed), which reduces the amount of the loan

Simple Interest Formula I = Interest ($) P = Principal (amount borrowed in $) R = Rate of interest (stated as a %) T = Time (fraction of year convert to a decimal) Interest (I) = Principal (P) x Rate (R) x Time (T) I = P x R x T

Computing Simple Interest Based on three elements Principal (P) amount borrowed Ex. Amount of the loan is $1,000 (Principal) Rate of interest (R) expressed as a percentage, convert to the decimal value Ex. 8% = 8/100 = 0.08 Ex. 12.5% = 12.5/100 = 0.125 Amount of time (T) expressed as a fraction of a year and then convert to the decimal value Ex. A 3 month loan = 3/12 or ¼ or.25 Ex. A 180 day loan = 180/360 or ½ or.50 Ex. A 24 month loan = 24/12 or 2

Let s try it I took out a loan for $500 (P). The rate (R) of interest for this loan is 12% (0.12) and I will pay the loan off in 4 months (T) - 4/12 represents the fraction of the year. What is the amount of interest (I) I will pay? I = P x R x T I = $500 x.12 x.3333 I = $20

Let s try another A loan was taken out for $1,000 (P) on July 1. The rate (R) of interest on the loan was 11%. The loan will be paid back on December 31. What is the amount of interest (I) paid on the loan? I = P x R x T I = 1000 x.11 x.5 I = $55

Now Let s Try This One An 18 month (T) loan was given at a 14% interest rate (R). The actual interest (I) paid on this loan was $230. What was the principal (P)? I = P x R x T P = I R x T P = 230.14 x 1.5 P = $1095.24

Find the Rate of Interest I = $150 P = $10,000 R =? T = 3 months R = I = $150 P x T $10,000 x.25 R = $150 =.06 = 6% $2500

APR Calculations Used for Installment Loans May involve a down payment Involves equal monthly payments (i.e., 8 monthly payments of $500) or (8 X $500) Add the down payment + the total of the monthly payments to determine the total price paid (or the total installment price ) Deduct the cash price from the total price paid to determine the finance charge

Calculating the Down Payment If the Cash Price of an item is $8,000 and a down payment of 15% is required to make the purchase on credit, how much (in $) is the down payment? Multiply $8,000 x 0.15 Down Payment = $1,200

Finding the Finance Charge Use the following formula Finance charge = Total price paid Cash price You bought a $3,000 stereo system on credit at Best Buy and when you paid off the credit loan you actually made payments totaling $3,125. What was your finance charge?

You bought a $7,500 home entertainment center at Sears on credit. You put $500 down and made 14 monthly payments of $625. What was the total price paid and the total finance charge on the loan? Total price paid = (#of payments x amount of each payment) + down payment Total price paid = (14 x $625) + $500 Total price paid = $9,250 How much did you pay in finance charges? Finance charge = Total price paid cash price Finance charge = $9,250 - $7,500 $1,750 Finance charge =

Computing the APR APR = 2 x 12 x f P (N + 1) f = finance charge P = principal or amount to pay off amount borrowed (cash price down payment) N = total number of payments for the loan

What was the Annual Percentage Rate? You bought a $7,500 home entertainment center at Sears on credit. You put $500 down and made 14 monthly payments of $625. What is the APR on the loan? APR = 2 x 12 x 1,750 7,000 (14 + 1) APR = 42,000 105,000 APR = 2 x 12 x f P (N + 1) APR =.4 = 40.0% f = finance charge P = principal or amount to pay off amount borrowed N = total number of payments

The purchase price of an item requires a down payment of $100, with the balance to be paid in 18 equal payments of $60 each. The cash price is $1,000. What is the Finance charge? What is the APR? Total price paid = (18 x $60) + $100 = $ 1,180 Finance charge = Total Price paid cash price Finance charge = $ 1,180 1,000 APR = 2 x 12 x 180 900 (18 + 1) = $ 180 = 4,320 =.2526 = 17,100 25.3% APR = 2 x 12 x f P (N + 1) f = finance charge P = principal or amount to pay off amount borrowed N = total number of payments