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Tuesday. Get a textbook Get a notes sheet Start filling in the vocabulary (top section). Chapter 4-Section 2. Sources of Loans and Credit. Types of Financial Institutions. Commercial Banks
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Tuesday Get a textbook Get a notes sheet Start filling in the vocabulary (top section)
Chapter 4-Section 2 Sources of Loans and Credit
Types of Financial Institutions Commercial Banks Bank who’s main function is to accept deposits, lend funds, and transfer funds among banks, individuals, and businesses. **Largest amount of funds** Functions: Checking, Savings, Loans for individuals, businesses and between banks. Examples: Any bank we are familiar with: Bank of the West Wells Fargo, Union Bank, First Bank, Etc.
2. Savings and Loan Association Depository institution that accepts deposits and lends funds. Functions: Personal Mortgages Commercial Mortgages Auto Loans Examples:
3. Savings Banks Depository institutions originally set up to serve small savers overlooked by commercial banks. Functions: Similar to S & L Mortgages Personal & auto loans Checking
4. Credit Unions Depository institution owned and operated by its members to provide savings accounts and low-interest loans only to their members. Functions: Lower interest loans Higher interest on savings Examples: NE Educators C.U.; NE Energy Fed’l C.U.; Other companies that have C.U.’s: Goodyear, State Farm, etc.
5. Finance Company Company that takes over contracts for installment debts from stores and adds a fee for collecting the debt. Consumer Finance Company--makes loans directly to consumers at relatively high interest rates. Examples: Payday Advance companies
Paycheck Advance Companies • How do they make sure the borrow will repay their loan? • Take care titles as security • What do you think would happen if the borrow didn’t repay their loan? • Loan company would take possession of the car • Sometimes charge 30% • Can spiral a persons financial situation until you’d possibly be paying a whole paycheck in fees.
Charge Accounts- 3 Options • Charge Accounts – credit extended to a consumer from a particular store. • Regular charge account – pay in full after 30 days • No interest if paid in 30 days • Revolving charge account – Can make more charges even if you haven’t paid in full. • Interest charged on unpaid balance • Installment charge account – equal payments spread over time. • Examples: major items—sofas, televisions, refrigerators
OTHER CHARGE OPTIONS “90 Days same as Cash” • You have 90 days to pay without store charging interest • IF you are a DAY late, you pay all the BACK INTEREST!!! • Higher interest rate than usual What you need to Know! What does this mean? What about interest?
Compare & Contrast Credit Cards vs. Debit Cards • Like charge accounts • Can be used at most stores in U.S. and even foreign countries • Examples: Visa, Mastercard • Can borrow cash (like access to a loan) • Must provide a signature Electronic transactions from your bank account Need a PIN instead of signature Do NOT provide loans or credit!
Finance Charges & Annual Percentage Rate(The cost of credit) • Finance charge – cost of credit expressed monthly in dollars and cents • Interest costs plus any other charges connected with credit are taken into account. • Computed in 4 Different Ways: • Previous Balance • Adjusted Balance • Average daily Balance • Past due Balance
Annual Percentage Rate (APR) Cost of credit express as a yearly percentage. What does that mean? A company that charges 18% APR would charge you $18 ANNUALLY for every $100 unpaid throughout the year
Did you know? Why would they accept credit cards? How does this charge get passed on to consumers? Stores have to pay a percentage of credit purchases to the company that issued the card.
Section 3 Applying for credit
A friend wants to borrow money from you. Would you lend it to him or her? What would you do? What factors in to your decision? How long would you give them to pay it back?
Some Vocabulary Credit Bureau – private business that investigates a person to determine the risk involved in lending to that person. Credit Check – Investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts. Credit rating – rating of the risk involved in lending to a person or business
Three C’s of Creditworthiness Capacity to Pay ~ How much debt do you have in relation to your income. Character ~ financial reputation as a reliable and trustworthy person. Collateral ~ something of value that a borrower lets the lender claim if a loan is not repaid. Cosigner (if needed) ~person who signs the loan with you and promises to repay if you do not.
Friday Bell ringer #2 Chapter 4 Section 3 Notes Credit Card Comparison If needed, time to finish glue activity from yesterday
Bell Ringer Name 3 of the 5 C’s of Credit Give an example of each
Will you be able to get credit? • Several factors determine a person’s creditworthiness. When applying for credit: • You will be asked to fill out a credit application. • The lender will hire a credit bureau to do a credit check. • The credit bureau will provide the creditor with a credit rating for you.
Higher the score, the less risk the person represents Higher scores get better interest rates AnnualCreditReport.com Can get a free credit report every 12 months from: • Equifax • TransUnion • Experian What factors might negatively affect your credit score?
Late payments High debt-to-income ratio Having many open accounts Previous bankruptcy Unemployment Legal trouble What hurts your credit rating?
Types of Loans Secured Loan Unsecured Loan Backed up with collateral. Can be the item being purchased (house, car, etc.) Guaranteed only by a promise to repay it. Not back with Collateral. Interest rate is usually higher
Responsibilities of a Borrower Paying your debts on time Keeping a complete record of all the charges you have made Notifying the issuer if your card has been lost or stolen
Monday Get books and notes out Bell ringer time – fill in two vocabulary words on notes ch. 4-section 4 Today: Bell ringer, section 4 notes Finish guided reading 4-3 & 4-4 – hand in Reminders: Test Thursday All “late” work due Thursday too!
Section 4 Government regulation of credit
Laws Continued… • 2. Equal Credit Opportunity Act • prohibits providers from denying credit based on race, religion, national origin, gender, marital status, or age.
Personal Bankruptcy • Bankruptcy—the state of legally having been declared unable to pay off debts owed with available income. • Used only as last resort! • When bankruptcy is approved through bankruptcy court, debtors must give up most of what they own, which is then distributed to the creditors. • By law, certain debts, such as taxes, must continue to be paid. • Bankruptcy proceedings remain on your credit record for 10 years.
