FINANCE



Name_________________________FINANCECH. 6- Bank Loans and Credit6.1 CONSUMER LOANSDefine:Installment loan- Loan with fixed payments, fixed rate & length of time. Examples:Car loan, Mortgage (30 year fixed-Traditional) Secured loan- Loan with collateral as the security - the bank will have a lien on the property (car, house) Collateral- The item that secures the loan (car, house) Lien-The lender (or bank) has legal ownership of the propertyUnsecured loan- The loan is only backed by the borrower’s credit (no collateral)Example: a $5000 line of credit with a bankOpen-ended loan- a loan that is flexible and does not have a fixed payment or time frame- can be used over and over. (Example: a line of credit or a credit card). Grace period- an extended time frame in which you can make a payment and avoid late charges.Fixed vs. Variable RatesA fixed rate does not change regardless of changes in other interest rates.A variable rate will adjust depending on economic interest rates Example: A credit card with a rate of Prime +3If the prime rate goes up (due to changes in Discount and Fed rate) so will the credit card rate. 1AGRANTING AND ANALYZING CREDITDefine:Risk Management- For bankers it’s the practice of minimizing financial loss through effective policies.6 Steps in the Credit- Approval Process1. Application2. Documentation3. Processing4. Underwriting5. Closing6. FundingSubprime rates- Higher rates charged to those customers with a high risk (poor credit)Consumer reporting agency (CRA)- Companies that keeps record of consumer payment history and sells this information to banks.There are 3 of them: 1) Equifax 2) Experian 3) TransUnion(list 5 areas of information that is listed on your credit reports)1. Personal Data2. Accounts History3. Delinquent Accounts4. Public Records5. InquiriesCredit scoring system- an efficient and unbiased method of evaluating credit- an actual numeric score.FICO score- a 3 digit credit scoring system most commonly used by financial institutions in determining a person’s credit worthiness. (list 5 areas of scoring): 1. Payment History (35%) 2. Amounts owed (30%) 3. Length of credit history (15%) 4. New credit (10%) 5. Types of credit (10%) 1BCOST OF CREDITDefine or Explain:APR- Annual Percentage Rate- amount of interest charged on the loan principal for a yearFinance Charges- The total amount of charges the bank will charge for the loan (compounded interest and fees)Minimum Payments- Used in credit cards- usually 2-5% of the unpaid balance that’s due each month.Term- for installment loans, the length of the loan (months,years)Overextension- taking on more debt than you can afford, when expenses are greater than income.Predatory Lending- lending credit to those with poor credit but increasing the interest rate beyond a reasonable amount.Credit Counseling- agencies that help people manage or consolidate their creditLook at the chart on page 161, BANKING MATH CONNECTIONAnswer the following question:Your credit card balance is $2500 and your minimum payment is 2 %.The APR is 18 percent.What portion of a credit card payment goes toward the principal and what is toward the interest?FORMULA: Rate / 360 X 30 X Balance = Interest$2500 x .02 = $50 minimum payment.015 / 360 x 30 x $2,500 = $31.25 interest$50 -$31.25= $18.75 toward reducing the balanceTHE LONGER THE TERM THE GREATER THE TOTAL FINANCE CHARGESLoan amount: $6,000Creditor A Creditor BCreditor CAPR 14%14%15%Length of Loan 3 years 4 years 4 yearsMonthly Payment $205.07$163.96$166.98Total Finance Charge$1,382.52$1,870.08$2,015.04Total Payments$7,382.52$7,870.08$8,015.046.4 Credit and the LawDefine or Explain:THE 4 CONSUMER PROTECTION LAWS (FOUNDATION)Truth in Lending Act (TILA)- Banks must disclose (explain) all fees associated with taking out a loan.Equal Credit Opportunity Act- prohibits the use of race, color, religion, age, etc to discriminate when lending moneyFair Credit Reporting Act- to give individuals the right to know what is reported from the credit bureaus. Fair Debt Collection Practices Act- protects customers from unfair collection techniques. Customers must be notified in advance before collection.OTHER CONSUMER LAWS:Fair Credit Billing Act- Fair practices for resolving billing disputesFair Credit and Charge Card Disclosure Act- credit card companies must disclose all fees.Home Equity Loan Consumer Protection Act- banks must disclose all fees related to open ended loans secured by real estate.Credit Repair Organization Act- Credit repair companies must disclose all fees and requirements.Gramm-Leach-Bliley Act- Compels banks to protect the privacy of consumers. Credit information and personal information cannot be disclosed unless necessary.2B ................
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