Learning Objectives part 1 of 2

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Chapter 7
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Learning Objectives (part 1 of 3)

• Describe the different types of installment loans
  
• Compute the monthly payment for an installment
  loan
• Explain why a monthly payment is not one-twelfth
  of an annual payment
• Construct a loan amortization table and explain
  the two reasons why it is important

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Learning Objectives (part 2 of 3)

• Show the impact on the amortization table of
  adding extra principal to a payment
• Explain how an add-on rate loan works
• Construct an amortization table for an add-on
  rate loan
• Identify the lenders who most commonly provide
  installment loans

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Learning Objectives (part 3 of 3)

• Evaluate whether it is better to take out an auto
  loan or a home equity loan to buy an auto
• Discuss what happens when you default on a loan
  with collateral
• List the protections a consumer has from a debt
  collector
• Discuss the two primary chapters for declaring
  bankruptcy 7 and 13
• Describe how bankruptcy works under each chapter

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Types of Installment Loans

• Auto Loan
• New or Used
• Home Improvement Loan
• Marine loan
• Signature
• Secured Personal Loan
• Household goods
• Certificate of Deposit

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Computation of Monthly Payment

• Payment x PVIFA Loan Amount
• Payment the payment made each period
• PVIFA the present value interest factor for the
  annuity based on the number of payments and the
  interest rate of the loan
• Loan Amount Amount initially borrowed
• Payment Loan Amount / PVIFA

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Example 1 (annual payments)

• Andy wants to take out a 10,000 home improvement
  loan. His local bank indicates he can have a
  five-year loan at an 8 percent interest rate with
  annual payments. What would his annual payment
  be?
• Answer 10,000 / 3.9927 2,504.56

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Example 2 (annual payments)

• Andy wants to take out a 10,000 home improvement
  loan. His local bank indicates he can have a
  five-year loan at an 8 percent interest rate with
  monthly payments. What would his monthly payment
  be?
• Answer 10,000 / 49.3169 202.77

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Relationship of monthly payment to annual payment

• Monthly payment is less than one-twelth the
  annual payment because the monthly payment allows
  a faster pay down of principal, which allows
  lower interest charges over time.

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Loan Amortization Table

• Two reasons why it is important
• Indicates how much would be owed if loan were
  paid off at any point in time (lenders
  occasionally miscalculate this number)
• Indicates how much of each payment is interest,
  in case the interest on the loan is tax
  deductible.

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Example of a Loan Amortization Table

• Loan 1,000, Term 12 months
• Interest Rate 12 percent
• Mo. Beginning PMT Interest Repay. End
• of Month of Prin. Of
  Month
• 1 1,000.00 88.85 10.00 78.85 921.15
• 2 921.15 88.85 9.21 79.64 841.5
• 3 841.51 88.85 8.42 80.43 761.08

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Impact of Adding Money to a Payment

• Loan terms same as previous example
• Add 100 to first payment
• Mo. Beginning PMT Interest Repay. End
• of Month of Prin. Of
  Month
• 1 1,000.00 188.85 10.00 178.85 821.15
• 2 821.15 88.85 8.21 80.64 741.51
• 3 741.51 88.85 7.41 81.44 659.07

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How an add-on rate loan works

• Total Interest Due Amount Borrowed x add-on
  rate x Maturity in Years
• Monthly Payment (Amount Borrowed Interest) /
  Maturity in months
• Amortization of interest based on Rule of 78

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Example

• 1,000 at 6 add-on rate for one year
• Interest 1,000 x .06 x 1 year
• 60
• Monthly payment (1,000 60) / 12 months
  88.33

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Amortization Table

• Mo. Beginning PMT Interest Repay. End
• of Month of Prin. Of
  Month
• 1 1,000.00 88.33 9.23 79.10 920.90
• 2 920.90 88.33 8.46 79.87 841.03
• 3 841.03 88.33 7.69 80.64 760.39

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Lenders of Installment Loans

• Commercial banks
• Mutual Savings banks
• Savings Loans
• Credit Unions
• Consumer Finance Company

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Auto Loan vs. Home Equity Loan to buy an auto

• Higher fees for a home equity loan
• Interest deductible on home equity loan
• With auto loan, loan is due if auto sold
• If pay off loan early enough, auto loan may be
  cheaper despite non-deductibility of interest
• With home loan, lose home if default

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Loan defaults

• Always better to try to work out an adjustment
  directly with lender
• After default, lender may seize property pledged
  as collateral
• If collateral sold, borrower still owes if sale
  net proceeds are insufficient to cover the
  principal due

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Protections from a debt collector

• Defined by the Fair Debt Collection Practices Act
  
• Contact only between 8 am and 9 pm
• No contact at work if know employer disapproves
• May not harass, oppress, or abuse, and may not lie

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Declaring Bankruptcy

• Chapter 7
• Liquidation chapter
• Chapter 13
• Reorganization chapter

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Chapter 7 Bankruptcy

• Exempt Nonexempt property
• Nonexempt is sold proceeds turned over to
  creditors
• All debt that can be discharged is so done,
• Stays on record for 10 years

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Chapter 13 bankruptcy

• Can use only if owe less than
• 250,000 in unsecured debt
• 750,000 in secured debt
• Works like a court imposed debt consolidation
  loan
• Stays on record for 7 years
• No mercy shown if fail to make promised payments