Chapter 7 Consumer Loans

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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

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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

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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-

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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

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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

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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?

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Sources of Consumer Loans(Lowest to Highest Cost)

• Credit Unions
• Banks
• Sales Finance Companies
• GMAC, Ford Credit
• Small Loan Companies
• Household Finance, Beneficial, Associates

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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

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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

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Changing Loan Interest Rates
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Changing Loans Maturity
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Obtaining a Favorable Rate

• Strong credit rating
• Larger down payment
• Provide security
• Shorter maturity
• Variable rather than fixed rate

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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?

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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

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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

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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

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