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Chapter 7 Consumer Loans

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Debt ratio: non-mortgage payments should not exceed 15% of ... Debt consolidation lowers payment, extends maturity. If all else fails, consider bankruptcy ... – PowerPoint PPT presentation

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Title: Chapter 7 Consumer Loans


1
Chapter 7 Consumer Loans
  • Loan agreement legal contract spelling out all
    terms and conditions of a loan other info in the
    loan disclosure statement
  • See Figures 7.1 and 7.2
  • - Shows APR, number and amount of payments, late
    charges, fees, security agreement and other terms

2
Types of Loans
  • Single Payment Other features
  • I P R T
  • Installment or Fixed/variable rates
  • Amortizing Acceleration
  • Secured loans Recourse
  • Know types, sources, advantages and disadvantages

3
Annual Loan Amortization6,000 loan at 15 p. a.
repayable annually over four yearsAnnual
repayment is 2,101.59 per year
  • Payment Ending
  • Year Total To Interest To Principal
    Principal
  • 1 2,101.59 900.00 1,201.59 4,798.41
  • 2 2,101.59 719.76 1,381.83 3,416.58
  • 2,101.59 512.49 1,589.10
    1,827.48
  • 4 2,101.59 274.11
    1,827.48 -0-

4
Home Equity Loans
  • Second mortgage (if loan is foreclosed, paid
    after first mortgage paid off)
  • Amortizing or revolving
  • Equity in home pledged as security
  • Interest is generally tax deductible
  • House at risk, reduced financial flexibility

5
Special Types of Loans
  • Student Loans
  • Federally subsidized on need and progress
  • Made to student or parent
  • Payment on parent loans begins immediately
    student loans deferred until after graduation
  • Car loans available from many sources
  • Payday loans can be 250 to 1,000!
  • Often use post dated checks

6
Student Loans Consolidation
  • Combine with spouses
  • Lengthens repayment, lowers the monthly
  • Complications
  • Divorce ½ end here Fed law prevails divorce
    courts cant separate no pay, ex responsible
  • Some advantages disadvantages greater?

7
Sources of Consumer Loans(Lowest to Highest Cost)
  • Credit Unions
  • Banks
  • Sales Finance Companies
  • GMAC, Ford Credit
  • Small Loan Companies
  • Household Finance, Beneficial, Associates

8
Payment Calculation6,000, Four years, 15 pa.
Payable Monthly
  • Principal PV - 6,000
  • End value FV 0 Paid off
  • How many payments? N (124) 48
  • Rate per month? I/Y15/12 1.25
  • CPT PMT 166.98 / month
  • 166.98 12 2003.81 per year

9
Payments, Interest Rates Terms
  • Changing the interest rate or lengthening the
    term of the loan can cause big changes in
    interest paid and/or payment amount
  • As interest rates increase, monthly payments
    increase (Fig 7.4)
  • As maturity lengthened, monthly payments decrease
    but total financing charges increase

10
Changing Loan Interest Rates
11
Changing Loans Maturity
12
Obtaining a Favorable Rate
  • Strong credit rating
  • Larger down payment
  • Provide security
  • Shorter maturity
  • Variable rather than fixed rate

13
Author's Advice
  • Don't borrow if you can avoid it
  • Control your use of debt it's expensive
  • How much can you comfortably carry?

14
Guidelines
  • Debt ratio non-mortgage payments should not
    exceed 15 of take-home pay
  • 28/36 ruleif total house payments are less than
    28 of gross income and total debt payments are
    less than 36, you are a good risk
  • Excluding mortgages and student loans, other
    debts should be paid every four years

15
Can't Pay Your Bills?
  • Put budget in place
  • Self-control in use of debt
  • Credit counseling
  • Borrow from lowest cost source
  • Debt consolidation lowers payment, extends
    maturity
  • If all else fails, consider bankruptcy

16
Bankruptcy
  • Very serious matter - on record for 7 or 10
    years
  • Chapter 13 regular income and limited debts
  • "Work out" program reschedules payment and
    permits retention of assets
  • Chapter 7 straight bankruptcy no hope of
    repayment
  • Eliminates debt, begin again, some assets sold
  • Most common 70 use

17

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