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Chapter 7

by: Jennifer Cartwright
Jennifer Cartwright
Virginia Tech

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About this Document

Consumer Loans: including student, auto, home owners
Personal Financial Planning
Dr. White
Class Notes
Loans, finance
25 ?




Popular in Personal Financial Planning

Popular in Agricultural & Resource Econ

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.

Similar to AAEC 2104 at Virginia Tech

Popular in Agricultural & Resource Econ


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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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