Dr. Debra Sherrill Central Piedmont Community College
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Understand the types of installment loans. Identify ways to pay for college. Know how to purchase a car. 3
I. Introduction to Financial Terms II. Installment Loan Basics III. Paying for College IV. Buying a Car 4
Introduction to Financial Terms 5
R = Revolving (example: MasterCard) I = Installment (example: car payment) C = Credit Line (example: HELOC) M = Mortgage O = Other 30 day account (example: American Express) 6
Amortizing requires an amount to be paid to cover the interest due plus an additional amount that will be applied to reduce the principal balance. A simple-interest loan amortizes with each payment: Balance X interest rate = interest due P&I payment made interest due = amount applied to principal Beginning balance amount applies to principal = new balance 7
There are several definitions of depreciation: The allocation of costs over a specified period (accounting). The decrease in value of an asset. Important: Cars will depreciate. WARNING: The loan balance may be substantially higher than the value of the vehicle. 8
Guaranteed Auto Protection Insurance that picks up the difference between the amount owed on a car loan and the actual market value of the car (as determined by an insurance company). Essential when buying or leasing a new vehicle. Without gap, you would be responsible for the difference in the insurance value and loan payoff if the vehicle was totaled in an accident. 9
Installment Loan Basics 10
The loan is repaid in equal monthly payments for a specific period of time. Examples include: Car loans Student loans Personal loans (secured and unsecured) Motorcycle / boat loans Furniture / appliances Mortgages 11
May be more difficult to obtain than revolving accounts. May or may not be secured against an asset. Usually requires verification of income or assets for approval (except student loans). High credit limit or balance is determined by the secured asset or approval. 12
Typically have a lower high APR (annual percentage rate) than revolving accounts. Interest is usually simple interest. Are closed-ended accounts with a set monthly payment and term. Penalties may apply for late payments. Once paid in full, the account is closed. 13
Collateral is any asset with value that is provided to the lender as security for the loan. If the loan defaults, the lender gets the security. If the collateral is not sufficient to repay the loan, the borrower is responsible for: - the remaining balance and - any fees and interest associated with the loan. 14
A loan that is not secured by collateral. If default occurs, the borrower is responsible for: - the remaining balance and - any fees and interest associated with the loan. 15
Annual percentage Rate (APR) Fixed-rate Loan Variable-rate Loan Finance Charges 16
A measure of the costs of the loan expressed as a yearly annual rate. Compare the APR rather than the interest rate, since the APR reflects the cost of interest and other fees. 17
Fixed-rate loan: A loan that has an interest rate than stays the same throughout the term of the loan. Variable-rate loan: A loan that has an interest rate that might change during any period, as written in the loan agreement of contract. 18
The dollar amount the loan will cost, including Interest Service charges Loan fees 19
Consumer Installment Loans Secured installment loans that are repaid in equal monthly payments for a specific period of time. You can use the item while you are making payments. Rent-to-Own Services Allows you to use the item for a specific period of time in which you are making payments (such as weekly). You do not have to purchase the item but a purchase plan may be set up. Charged interest and can compare APRs and other fees. Generally, less expensive than rent-to-own agreements. Lender must approve the loan. Not a loan and no interest is charged. Other fees may apply. By making the weekly payments, you typically pay more than if you used cash or an installment loan. Limited credit check, if any. 20
Consumer Installment Loan Advertised price = $1,500 Rent-to-Own Advertised price = $55 every other week for 2 years 12% APR for 2 years No loan no APR quoted $70.61 X 24 months = $1,695 $55 X 26 = $1,430 first year $55 X 26 = $1,430 second year TOTAL = $2,860 Savings: $1,165 21
Paying for College 22
Cash (from earnings, savings, & investments) Gifts Credit cards Personal loans Scholarships (private and public) Grants (federal agencies) Student Loans 23
Many students need to obtain student loans to complete college. Many students do not understand the different types and requirements of student loans. There are federal student loans and private student loans. 24
Government programs that typically have longer and more favorable terms. Delinquency begins the first day a borrower misses a payment. Federal student loans cannot typically be erased by a bankruptcy. A default may result in the IRS seizing all income tax refunds or garnishing wages until debt is paid. Individuals who default on federal student loans are not eligible for other types of federal loans. There is no statute of limitations on federal debt. 25
Offered by companies and investors such as Sallie Mae. These tend to have stricter guidelines and less favorable terms than federal student loans. Terms may be very competitive, so compare offers. Creditors can sue borrower in the case of a default. 26
Student must be enrolled at least part time and requires an annual FAFSA. These tend to have fixed rates. Subsidized Stafford Loans: These are based on needs and interest does not accrue while in school or during a six-month period after leaving school. Unsubsidized Stafford loans: Interest accrues from the beginning. 27
Based on financial needs. Similar to Stafford loans, but has a longer grace period and no fees. 28
$40,000 student loan at 6.5% for 25 years = $270.08 29
Buying a Car 30
Should I get a new or used car? Should I lease or buy? How much can I afford? Should I trade in my old car? 31
Six factors to consider: 1. Ownership potential 2. Wear and tear 3. Monthly payments 4. Mileage limitations 5. Auto insurance 6. Cost 32
Car belongs to you and the bank until loan is paid off. The car becomes yours after the loan is paid in full. Car loan You are essentially renting the car. You make the payments for a set number of years. When the lease ends, you return the car to the dealership. Car lease 33
No additional costs for wear and tear in the loan agreement. Most leases charge extra for any damage found at the end of the lease that goes beyond normal wear and tear Car loan Car lease 34
Payments are higher and set for a period of time. Payments are lower because you are renting the car. When the loan is paid in full, you own the car. One lease ends, the car is returned to be sold to you or another customer. If you decide to purchase the car, a new loan is created and the total costs will be higher than if you had originally purchased the car. Car loan Car lease 35
No mileage restrictions. Leases restrict the number of miles per year. If you exceed the allowance, there will be a per mile fee assessed at the end of the lease. Example: 15 cents/mile @ $4,000 miles = $600 due. Car loan Car lease 36
Lenders require full coverage. Typically, less expensive than insurance for leased cars. Most leases require higher levels of coverage. Typically more expensive than if owning the car. Car loan Car lease 37
Typically cost more in the short term than a lease. Typically cost less in the short term. Total loan and monthly payments are likely to be higher. Car is owned once loan is paid. Monthly payments are likely to be lower. Mileage, wear and tear, and other fees may be added at end of lease. Must then lease or purchase a car. Car loan Car lease 38
Banks Credit unions Finance companies Car dealerships Buy-here, Pay-here dealerships Compare all loan terms including fees and APR! 39
Watch out for bait and switch ads. Watch for add-ons that may increase the cost of the vehicle (service contracts, credit insurance, extended warranties, and others). Be aware of ads that promise loans for people with bad credit. These may require a high down payment and/or have a very high APR. Be aware of all required deposits and if this is refundable. Be aware of any penalties for pre-paying. Know repayment terms and due dates BEFORE you sign. 40
1) Down payment 2) Monthly payments 3) Insurance 4) Tag, personal property tax, inspection, and miscellaneous fees 5) Maintenance costs 41
Before you go car shopping: Know exactly what terms for which you can be approved in a less stressful environment. Avoids interest rate markups at dealerships. Ask if they offer gap insurance. Allows you to compare financing deals available to you (financial institution versus car dealership). 42
1) Narrow the list to affordable cars. 2) Research these cars: Kelly Blue Book Fuel Economy Consumer Reports www.kbb.com www.fueleconomy.gov www.consumerreports.com 3) Discuss your list with your insurance agent. 4) Decide which one may best suit your needs and budget. 43
1) Know the difference between retail and trade-in values. Hint: Most dealers will only pay for average condition, even if the car is in excellent shape. 2) Expect that dealers will want you to pay full retail for the car you are buying, while paying you the lowest amount for your vehicle. 44
1) Know the reputation of dealerships. 2) Don t be committed to only one dealership, as this will limit your options. 3) Avoid any dealer that states you must purchase today to receive a special deal. 4) Remain neutral and don t buy on emotion. 5) Beware of buy-here, pay-here lots. 6) There is no guarantee that you can get the best deal from a large dealership or a small dealership. The buyer must always compare offers. 45
1) Never disclose a desired monthly payment. 2) Avoid the test drive trick. 3) Don t fall in love with a car. 4) Understand the salesperson/manager two-on-one game. 5) Watch for numbers switching relating to payments, interest rates, term, sales price, trade-in values, and down payments. 6) Don t succumb to pressure or insults. 7) Be prepared to walk away, or do NOT go car shopping. 46
1) Compare pre-approval and dealership financing options. 2) Read every line of the sales contract to ensure accuracy. Do not participate in fraud! 3) Understand that financing and extras can pad dealer profits. 4) Think twice before agreeing to extras such as a) extended warranties, b) gap insurance, c) credit life insurance, d) paint or fabric protection, or e) others. 5) Be prepared to say no to unwanted extras or to walk-away if the terms are not acceptable. 47
1) Make sure you have a copy of all signed documents. 2) Carefully check the vehicle for required equipment, manuals, and warranty information. 3) All outstanding items must be in writing with a specified date to be resolved. 4) Understand all features of the vehicle. 5) Make sure you can safely drive the vehicle before leaving the dealership. 48
1) Contact your insurance agent as soon as possible after a purchase. 2) If a car has been traded, cancel existing insurance. 3) Check on possible pro-rated refunds for extras such as extended warranties and gap insurance. 4) If a loan for the trade-in was paid off in the transaction, monitor the account to make sure payoff is received in a timely manner. 5) Know when and where to send your new payment. 49
When you know you can comfortably afford the new payment and the benefits outweigh the consequences. 50
Loan approval does NOT mean that you can afford the new credit! 51
Housing debt plus all monthly consumer debt X 100 = % Total gross monthly income Your total debt ratio should not exceed 45%. 52
Identify types of installment loans. Understand the ways to pay for college. Know how to purchase a car. 53
Examples include: Car loans Student loans Personal loans (secured and unsecured) Motorcycle / boat loans Furniture / appliances Mortgages 54
Cash (from earnings, savings, & investments) Gifts Credit cards Personal loans Scholarships (private and public) Grants (federal agencies) Student Loans 55
Tip # 1: Know what you can afford Tip # 2: Get pre-approved for financing Tip # 3: Know what to buy Tip # 4: Know retail and trade-in values Tip # 5: Know where to shop Tip # 6: Know how to shop Tip # 7: Financing the car Tip # 8: Before you take delivery 56
Dr. Debra Sherrill Central Piedmont Community College