Chapter 7 AAEC 2104
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This 4 page Class Notes was uploaded by Jennifer Cartwright on Monday April 4, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 24 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.
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Date Created: 04/04/16
Chapter 7: Consumer Loans Consumer Loans o Any loan not related to a house Auto, student, vacatioin, personal o Home Equity loans/ lines of credit HEL, HELOc Basics o Single payment vs. installment o Secured vs. unsecured Secured means guaranteed by collateral Default on the loan means repossession foreclosure May still owe the lender money after repo Lenders usually lose money with loan defaults Unsecured means no guarantee For best consumers Probably high APR Lenders hate to foreclose and repossess o Fixed vs Variable interest rate Fixed rate stays constant for life of loan Periodic payments Variable rate is tied to an index May change montly, annually… o Usually annual and lifetime cap Typically changes monthly payment Riskier Loan Contracts o Legal document that spells out the terms Who is involved How much is borrowed Repayment terms What is collateral Default actions Auto Loans o Usually secured by auto o Terms 3-6 years May see 7-9 Long term means higher APR o Usually fixed o Lender wants to see: Credit score, income/employment verification, may a balance sheet Student Loans o Federal direct/ Stafford loans Limits on how much you can borrow per year No interest payments until after grad First payments are 6 mo after graduation Relatively low interest o PLUS/PLUS direct Usually higher borrowing limits Interest rates tied to T-notes, capped at 8.5% Begin making payments immediately o Perkins Loans Exceptional financial need These loans come from the school o Private loans Higher interest rate Probably unsubsidized Student Loans: Repayment o Standard plan 10 years, fixed payment of at least 50 per month o Graduate plan 10 years, payments start low and increase every 2 years o Extended plans 12-25 years, fixed or graduated payments Eligibility depends on situation o Income-Based Repayment Plan Up to 25 years Must qualify for financial hardship to participate Max monthly payment, 15% of monthly discretionary income AGI-150% of poverty guideline Payment changes as income changes After 25 years of paying, remaining balance may be forgiven o Income-Contingent Repayment Plan Up to 25 years Monthly payments are based on household income, family size, and amount of loans Recalculated each year After 25 years of repayment, remaining debt is forgiven o Income-Sensitive Repayment Plan Up to 10 years Payments based on income Lower than standard plan o Pay as You Earn Plan Must have financial hardship to qualify Monthly payments capped at 10% of discretionary Difference between AGI and 150% of poverty level Recalculated as your AGI changes Payments are lower than for standard 10 yr Up to 20 years Outstanding balance will be forgiven Student Loan Consolidation o One big loan instead of several smaller Make one payment/month o Fixed interest rate for life of the loans o Must have graduated, left school, or dropped below .5 time to qualify o Can stretch payments up to 30 yrs Student Loan: Other o May qualify for deferment or forbearance o Loan forgiveness Teacher loan forgiveness 5 years teaching at low income primary or secondary school Forgive up to 17,500 of loan balance Public service loan forgiveness Make 120 full payments, work in public service Forgive remaining balance after 120 payments Student Loan – Vet Program o Feds will pay off up to 25,000/year o Must work in NIFA designated vet shortage areas Max three years Home Equity Loans/LOCs o Borrowing against the equity in your house (up 85%) o HEL= borrowing a stated amount o HELOC=revolving credit up to a credit limit o Interest is tax-deductible Effective interest rate = APR * (1-MTB) People use HEL/HELOCs to pay off higher interest debt o Typically lower APR than other consumer loans o Can utilize the equity today vs waiting o House is at risk if you default Payday Loans o Short-term loans for cash strapped o Fee involved each time Cost of Installment Loans o Simple interest method Pay interest on the principal outstanding Stated interest rate = APR o Add-on or Discount Methods All interest is based on original loan amount Stated interest rate < actual APR Pre-Payments on loans o Read the loan contract o Pre-payment penalty o Compare penalties and fees Loan Prepayments o Here’s how it works: First portion of your total payment pays all interest due Remainder all goes towards principal Dramatically reduces your interest and payment term o Check to be sure your extra payment goes towards the principal Sources of Consumer Loans o Commercial banks o Credit unions o Savings and Loans o Point of purchase o Payday lenders, check cashing firms, pawn shops Getting Loans o How to increase the odds Have a good credit score Make a large down payments Prove your cash flow ability Pledge something for collateral Get a co-signer Choose a variable rate loan and/or shorter term Look for someone to guarantee the loan Bankruptcy o A tool for improving your debt situation o Does not affect: Federal loans Income tax liabilities Alimony o Chapter 7: straight bankruptcy Most severe Eliminates debt May lose personal assets Stays on credit report for 10 years Last resort o Chapter 11: business o Chapter 12: farm o Chapter 13: wage-earner Easier to qualify for Plan to repay creditors Protects from creditors Stays on your credit history for 7 years
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