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Banking Unit 2: Getting a LoanCredit Ratings is always a good idea to spend money that you already possess. However, there may be situations where it is necessary to apply for a loan. The following information will guide you through the process of some calculations to determine the right means to approach getting a loan.How does a lender, like a bank, find out if they should loan you the money you need?All of the types of credit that you may use - credit cards, car loans, personal loans, mortgage, lines of credit - become a part of your?credit history. An agency will give you a credit score that tells the bank whether or not they should lend you the money.The higher your score, the better!These agencies will provide the lender with your credit score and your credit history.What factors are used to determine your credit score and credit history? Read through the information on?this website. TermsThere are several ways to borrow money that vary in their terms and conditions. Below are some things that you will need to consider when looking at a loan.Interest Rate?- What percentage of the loan amount do you need to pay back every year? This is the cost of borrowing the money.Term?- Term is the length of time you will take to pay back the loan. Some loan products require that you pay off the loan over a certain amount of time (3, 5, 8 years).Monthly Payment?- Some types of loans have set payments that you must make every month while others only require that you pay some minimal amount on a regular basis (as little as just the monthly interest).Secured vs. Unsecured?- A secured loan means that you are putting up something you own as collateral. If you don't pay off the loan, the lender will then own the property (land, vehicle, etc...) that you used as collateral.Penalties or Fees?- Some loan products have extra fees that you must pay on top of paying the interest. There may also be penalties to pay if you make a late payment or even if you pay off the loan early.Interested in that Interest?The interest you pay on a loan or any type of credit card is sometimes referred to as the cost of borrowing. Ideally you want to pay as little interest as possible.Remember, this is money you are paying on top of what you borrowed. How much interest do you pay on what you owe??PracticeThe Monthly Loan Payment Calculator is a spreadsheet that you can download and use in order to answer the questions that appear below.Once you have downloaded this?Monthly Loan Payment Calculator , (above) alter the required fields using the data below in order to answer the various questions.You have borrowed $5000.00 at an annual interest rate of 9.5%. You will pay it back monthly over two years.?QuestionWhat is the monthly loan payment?$229.57?QuestionHow much in total do you end up paying over the two years? HYPERLINK "; \l "answer2"Answer229.57 x 24 = $5509.68?QuestionHow much interest did you end up paying? HYPERLINK "; \l "answer3"Answer5509.68 - 5000 = $509.68What YOU ControlWhen you borrow money, there isn’t a lot that you control. The bank will set the interest rate and determine how much you can borrow, but you?do?control the length of time you take to pay back the loan and the payment method (e.g., pay the loan off monthly, bi-weekly, or weekly).You should select the length of time and payment method based on what you can afford when you look at your entire financial picture. You may want to pay off the loan as quickly as possible, but you may not be able to afford the larger payment.What affect does the term of the loan and the payment method have on the amount of interest you pay?PracticeUse the Monthly Loan Payment Calculator spreadsheet again in order to answer the questions that appear below.You have borrowed $5000.00 at an annual interest rate of 9.5%. You will pay it back monthly over two years. Recall that the monthly payment was $229.57.?QuestionIf you changed the term of the loan to one year, what is the new monthly payment? HYPERLINK "; \l "answer4"Answer$438.42QuestionHow much, in total, do you end up paying if you paid off the loan in one year? HYPERLINK "; \l "answer5"Answer438.42 x 12 = $5261.04?QuestionHow much interest would you save if you paid the loan off in one year instead of two? HYPERLINK "; \l "answer6"AnswerInterest for one year: 5261.04 - 5000 = $261.04Interest savings: 509.68 - 261.04 = $248.64PracticeUse the second sheet, Loan Calculator-Payment Method tool, to answer the questions that appear below.What if we paid off the loan more frequently? Change the term of the $5000.00 loan back to two years.?QuestionHow much interest would you pay if you paid the loan off biweekly? HYPERLINK "; \l "answer7"Answer$105.75?QuestionHow much interest would you save if you paid the loan off biweekly instead of monthly?Interest for biweekly: 105.75 x 26 x 2 = $5499.00Interest: 5499 - 5000 = $499.00?QuestionHow much interest would you save if you paid the loan off in one year instead of two? HYPERLINK "; \l "answer9"AnswerInterest savings: 509.68 - 499 = $10.68?QuestionIf you pay weekly, what is your payment? HYPERLINK "; \l "answer10"Answer$52.83QuestionHow much interest would you pay if you paid the loan off weekly? HYPERLINK "; \l "answer11"AnswerInterest for weekly: 52.83 x 52 x 2 = $5494.32Interest: 5494.32 - 5000 = $494.32?QuestionHow much interest would you save if you paid the loan off weekly instead of monthly? HYPERLINK "; \l "answer12"AnswerInterest savings: 509.68 - 494.32 = $15.36One final factor that you can control is the amount of your payment.If you can afford it, you can pay more than the minimum repayment amount for the loan. This will help you by reducing the amount of interest you pay; it will also reduce the term of the loan. Or ONLY PURCHASE AN ITEM THAT YOU KNOW YOU HAVE MONEY TO PAY AT A LATER DATE (WITHIN 30 DAYS).Financing a PurchaseFind an advertised price for a big ticket item you'd be interested in buying (a television, a new computer, exercise equipment, a couch, etc...). Try to choose something that costs more than?$1000.00.Imagine you could get a loan to buy that item today. You're being offered an 8% interest rate over 3 years, with monthly payments.Answer the following questions:What would your monthly payment be?How much, in total, do you end up paying over the three years?How much interest do you end up paying?If you paid over 2 years instead of 3, how much would you save in interest charges?If you paid on a bi-weekly schedule over 3 years instead of a monthly schedule, how much would you save in interest charges?Submit your calculations and your answers to your teacher.Getting Help with Borrowing DecisionsFinancial institutions like banks are businesses and when banks provide loans, they are selling a service. To make the most money, they would like to lend you the most amount of money that you will be able to repay over the longest period of time with the highest possible interest rate. How does this match up with your needs? What should your goal be when borrowing money?In a discussion in paragraph format, prepare an answer to the following questions:What steps can you take to make sure you get the best deal on a loan?What resources can you use to help you make the best borrowing decisions?for you?What factors should you think about before taking out a loan?What steps can you take to make sure you pay the least amount of interest possible?Which people or organizations will have?your?best interests in mind and help you make borrowing decisions?It is obviously best to avoid using a loan or credit card for a purchase you do not have the money to purchase (within the next 30 days or less), but where might a loan be needed? ................
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