Transcript Personal Financial Literacy

Chapter 8
Paying for Credit
Copyright 2007 Thomson South-Western
Manual Payments
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Cash
Personal checks
Money orders
Bank checks
– Cashier’s check
– Certified check
8-1 Payment Methods
Slide 2
Manual Payments
• Money Order—a type of check that directs
payment of a sum of cash to a payee.
• Purchased at banks, post offices, stores.
• Advantage: it is prepaid. Payee is
guaranteed payment. Check cannot bounce.
• Disadvantage: must pay a fee, and stand in
line to purchase.
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Manual Payments
• Cashier’s Check—also prepaid so the
payee is guaranteed of payment.
• Purchased at banks or credit unions.
• May be charged a fee
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Manual Payments
• Certified Check—personal check for
which payment is guaranteed by the
bank.
• Bank sets aside funds from your
account payable only for this check.
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Electronic Payments
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Online and telephone payments
Online banking
Automatic payments
Wire transfers
8-1 Payment Methods
Slide 6
Electronic Payments
• Online Banking—
allows you to make
payments and
manage your
account using the
bank’s website.
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Electronic Payments
• Automatic Payments—the bank
transfers money from your checking
account to some other account.
• Payment is made each billing period.
• Remember to keep enough money in
your account to cover the payment!
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Electronic Payments
• Wire Transfer—sending money
electronically through companies such
as Western Union.
• Sender pays the amount plus a fee.
• Money is delivered to an agent location.
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Electronic Payments
Users can
enter bank
account
information to
set up online
payments.
8-1 Payment Methods
Slide 10
Prepayment Penalties
• Prepayment penalty is a fee charged
when you pay off the loan before the
agreed-upon time.
• Sometimes repaying a debt early can
be a wise choice, even with a penalty.
• If the penalty is less than the interest
you would pay on the original schedule,
paying off the debt is to your
advantage.
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Prepayment Penalty
• A fee charged when you repay a loan
before the agreed-upon time
INSTALLMENT PAYMENT PLAN
Terms: $10,000, 5-year loan, at 8% interest, with
a 60-day interest penalty for early repayment
Initial Balance
Monthly Payment
Current Loan Balance
(at payoff after 1 year)
60-Day Interest Penalty
Balance to Be Paid
8-1 Payment Methods
$10,000.00
$202.76
$8,305.60
$110.74
$8,416.34
Slide 12
Building Communications Skills
Formal Speaking
• Used to convey information, entertain, or
persuade
• Use an outline to develop the content
• Consider the listeners
• Use visual aids such as electronic slides
• Stay within the time limit
8-1 Payment Methods
Slide 13
Check In #1
1. List four types of manual (non electronic) ways to
make payments on a credit account.
2. What is a wire transfer? What is its primary
advantage?
3. What are the advantages and disadvantages of
making a payment using a money order?
4. What is the difference between a cashiers check
and a personal check?
5. What is a prepayment penalty? Why might you still
wish to pay off a loan early, even when there is a
prepayment penalty?
Slide 14
Types of Loans
• Installment loans
• Personal loans
• Secured loans
– Car loans
– Mortgages
– Amortization
Many people who buy houses finance
the purchase with a mortgage loan.
8-2 Consumer Loans
Slide 15
Types of Loans
• Personal Loans—
loans that are based
on personal credit
worthiness.
• Personal loans
represent a bigger
risk to the lender
than a secured loan.
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Types of Loans
• Secured Loan—debt agreement in
which the borrower pledges property of
value as security.
• This property is called collateral.
• If borrowers do not have collateral, they
may use a cosigner.
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Types of Loans
• Car loans—the car
itself serves as the
collateral.
• The creditor holds
the title until the
loan is paid off.
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Types of Loans
• House Loan—a mortgage is a loan that
is used to secure financing for the
purchase of a house.
• Ten to thirty years of payments
• Fixed or adjustable rate (ARM)
• Balloon payments, large amount at the
end, can reduce the monthly payments
• Closing costs—expenses the buyer
pays in order to get the loan.
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Amortization
• Repaying a debt by making regular
payments of principal and interest over
a period of time is called amortization.
• Payments reduce both the principle and
interest.
• Loan interest rate computes monthly
payments
• APR includes other loan fees, such as
closing costs.
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Student Loans
• Student loans are
debt which is used
to finance education
costs.
• Secured from banks
or government.
• Subsidized loans—
government pays
interest while
student attends
school.
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Lease/Rent-to-Own
• The renter uses and pays rent on an item
• After a set number of payments, the renter
owns the item
• Advantages
– Low or no down payment
– Try before you buy
• Disadvantages
– Total price is much higher than simply buying
– No payments are refunded if the item is returned
8-2 Consumer Loans
Slide 22
Lease/Rent-to-Own
• Take the item home, like a television
• Each week make rent payments
• When a certain amount of payments
have been made, you own the item.
• Disadvantage: total price of item is
higher than if you had bought it outright.
• If you decide not to buy, no refunds of
any payments.
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Use Credit Wisely
• Establish credit
when you do not
need it.
• Pay all bills on time
to build a good
history.
• Always have a
backup plan for
handling expenses
if you are out of
work for a time.
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Use Credit Wisely
• During good economic times, interest
rates are usually rising. This would be
a good time to save money instead of
buying on credit.
• The opposite is true when the economy
is slowing down. People are buying
less, prices drop, and there are better
values.
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Study Credit Offers
• Compare terms and conditions:
• Interest Rates—fixed or variable?
• Grace period—time before credit card
companies begin charging interest.
• Method of computing interest
• Annual fee
• Minimum finance charge
• Transaction fees
• Cash advance fees
• Late fees/over-the-limit fees
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Reduce and Avoid Costs
• Keep the number of credit cards and
accounts to a minimum.
• Comparison shop when getting a loan.
• Use credit to take advantage of sale
prices.
• Make your purchase right after the
closing date of your billing cycle.
• Take advantage of cash rebates and
rewards
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Check In #2
1. What is a personal loan? What factors
affect the amount of a personal loan
for which you may be approved?
2. What is the purpose of a student loan?
3. What is a subsidized student loan?
4. How does a lease to own agreement
work?
5. What does it mean to amortize a loan?
Slide 28