Costs and methods of obtaining credit

```Carl Johnson
Financial Literacy
Jenks High School
A
loan is money that you borrow and must
repay


Before you take out a loan, make sure that you
can repay
The best way is to use the debt payment to
income ratio

The percentage of debt you have in relation to your
net income
 Net income is the income you receive
 You should spend no more than 20% of your income
on debt payments Lower than 20% is even better!
 Calculate this by dividing your total monthly debt
payments by your monthly net income (Not including
housing…)
 How

much will loan cost you?
The finance charge is the total dollar amount you
pay to use credit


You will pay a finance charge to a creditor on any
unpaid balance
It is calculated using the annual percentage rate (APR)
 APR is the cost of credit on a yearly basis that is
expressed as a percentage


Ex. An APR of 18% means that you would pay \$18 per
year for each \$100 you owe
See the APR table on page 165 for examples in
calculating APR
 You
will be able to choose among various
features when applying for financing



Length of loan
Amount of monthly payments
Interest rates
 Some
people might want longer term
financing in order to have smaller monthly
payments
 Some might want a smaller down payment or
low fixed payments with a large final
payment
 Some
options for lower interest rates might
be:


Variable interest rates
Secured loans



Collateral is a form of security to help guarantee that
the creditor will be repaid
Up front cash
Shorter terms
 Most
common method is by using simple
interest

Three factors are involved



Principal
Interest Rate
Amount of time
 Other

Simple interest on a declining balance


methods may include:
Most credit unions use this
 The
Truth In Lending Act requires that
creditors inform consumers as how the
finance charge and APR will affect their costs
 Minimum
monthly payments are the smallest
amount that you can pay and remain a
borrower in good standing
 The negative is that will take you a lot longer
to pay off your loan and the more interest
you will pay
 Factors
that will determine whether a lender
will extend credit to you





Character – Will You Repay The Loan?
Capacity – Can You Repay The Loan?
Capital – What Are Your Assets/Net Worth?
Collateral – What If You Do Not Repay The Loan?
Credit History – What Is Your Credit History?
 Your
credit rating is a measure of a person’s
ability and willingness to make credit
payments on time
 Factors that determine your credit rating



Income
Current Debt
Character Information
 The
Equal Credit Opportunity Act (ECOA)
gives all credit applicants the same basic
rights. They may not use race, nationality,
age, sex, marital status and certain other
factors against you
 The
ECOA gives you the right to know the
reasons for the denial
 If information is from a credit report, you
are entitled to know what specific
information in the report led to the denial
 You can contact the credit bureau and ask
for a copy of your report


It is free within 60 days within the denial of your
application, or one free report each year
You may ask the bureau to investigate and
correct any inaccuracy that is contain in your
record


is collected and maintained by a credit bureau
There are three major credit bureaus




Experian
Trans Union
Equifax








Employer/Position/Income
Birth Date
Previous Employers
Spouse
Social Security Number
Homeowner/Rental Status
Detailed Credit Info – Applications/Payments/Debt
 Congress
passed the Fair Credit Reporting Act
in 1971 which regulates the use of credit
reports

Requires deletion of out-of-date info, as well as