FIN380 Lecture 11 Notes CONSUMER LOANS AND CREDIT
FIN380 Lecture 11 Notes CONSUMER LOANS AND CREDIT FIN 380
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This 5 page Class Notes was uploaded by Myles Daniel on Wednesday April 20, 2016. The Class Notes belongs to FIN 380 at Arizona State University taught by Hoffman in Spring 2016. Since its upload, it has received 23 views. For similar materials see Personal Financial Management in Finance at Arizona State University.
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Date Created: 04/20/16
Consumer Loans Secured loans have collateral or a cosigner Unsecured loans or signature loans have no collateral Types of consumer loans -auto -school -furniture/household appliances -consolidation Always remember to shop around for loans/credit. Where do you get an installment loan? -banks -credit unions -finance companies -retailers/manufacturers Loan Disclosure Statement (required by law) 1. Annual Percentage Rate or APR 2. Total value of all payments 3. Actual loan amount 4. Total finance (interest) cost Acceleration Clause - if you miss a payment (or a specified number of payments), the entire loan balance may be due Recourse Clause - what the lender will do if you default -court costs -raise the interest rate Balloon Payment - smaller monthly payments are used but they won’t pay off the loan during the time frame- resulting in a large final payment Consumer credit is defined as nonbusiness debt used by consumers for nonmortgage expenditures Why is having credit important? - it gives us the ability to purchase goods/services and pay over time How do you develop a strong credit history? - pay your bills on time A person’s credit score is a single number that summarizes and grades your creditworthiness. The most commonly used score is the FICO score (named after Fair, Isaac & Co.) Your credit score is based upon the following factors: 1. On-time payment history (35%) 2. Length of credit history (15%) 3. The amount owed (30%) relative to your credit limit 4. New credit (10%) Fewer inquiries raise your score 5. Type of credit used (10%) The more variety of debt used, the higher your score. You can obtain a free credit report from all three major credit bureaus at www.annualcreditreport.com Generally, it is considered good to keep your credit charges at 20% or less of your take-home pay. The five Cs of Credit 1. Character - will you repay the loan 2. Capacity - can you repay the loan 3. Capital - what are your assets and net worth 4. Collateral - 5. Conditions - economic conditions and job security Types of consumer credit- 1. Single payment loans 2. Revolving credit - credit is extended in advance of the actual transaction -department store credit cards -VISA (BofA vs. Sierra Club) Affinity cards -MasterCard -American Express -personal line of credit (unsecured) -home equity line of credit -secured credit card requires a deposit 3. Service credit - full payment is not required when services are rendered (utility co.) Aspects of a credit card 1. Teaser rates 2. Default rate - very high APRs that are assessed whenever certain rules of the account are violated (late payments) 3. Variable interest rate - are fixed rate cards really fixed? 4. Annual fees and fees for late payments and over- the-limit charges 5. Liability of lost or stolen cards 6. Credit card insurance to reimburse you for the first $50 in liability (do not purchase) 7. Credit life insurance - pay off your balance if you become sick or die (do not purchase) Advantages of a credit card: -interest free grace period (usually 20 days or more) -record keeping -convenience -available for emergencies Disadvantages of a credit card? Debit card Usury laws - state laws governing interest rates. Arizona has a limit of 36% annual interest. The three major national credit bureaus: (over 1000 total) -Experian (the largest which has over 90 million credit files) -Equifax -TransUnion Credit Legislation: 1. Equal Credit Opportunities Act - main purpose is to prohibit discrimination 2. Fair Credit Reporting Act - -30 day deadline for fixing mistakes -creditors need to provide accurate information -job applicant’s permission is required to pull a credit report -toll-free numbers with employees answering during business hours -toll-free numbers for removing one self from lists used by credit card companies and direct marketers -one free credit report annually from each major credit bureau 3. Fair Credit Billing - -time frames for renewing, disputes, stop payments for defective or missing purchases 4. Consumer Credit Protection Act -“Truth in Lending Act” -accurate disclosure of fees -APR -limited liability of $50 per card 5. Credit Card Accountability, Responsibility and Disclosure Act - makes it harder for anyone under 21 to get a card - bans retroactive rate increases - same payment due date each month - 45 day notice for interest rate increases - mail statements at least 21 days prior to due date Consumer Credit Counseling Services (CCCS) - a non- profit organization that provides debt counseling services for families and individuals with serious financial problems. ( 1-800-388-CCCS ) Bankruptcy - Chapter 13 or the “wage earner plan” is a debt restructure or repayment plan that allows the debtor to keep assets and make easier payments (interest and late fees may be dropped) - Chapter 7 or “straight bankruptcy” which allows the debtor to start over with a clean slate. Certain assets can be kept (car, home with a maximum level of equity…) while many other assets will be sold off to satisfy claims. Most debts will be erased. Can’t file again for eight years. - Chapter 11 is used by high income earners and the debt restructure has to be approved by the creditors
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