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Borrowing Basics 1
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Borrowing Basics 2
Introduction
• Instructor and student introductions
• Module overview
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Borrowing Basics 3
Student Introductions
• Your name
• Expectations, questions, and concerns about borrowing money
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Borrowing Basics 4
Purpose
Borrowing Basics:
• Describes how credit works and the types of credit available.
• Helps you determine if you are ready to apply for credit.
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Borrowing Basics 5
Objectives
By the end of this course, you will be able to:
• Define credit.
• Explain why credit is important.
• Distinguish between secured and unsecured loans.
• Identify three types of loans.
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Borrowing Basics 6
Objectives (Continued)
• Identify the costs associated with getting a loan.
• Explain why it is important to be wary of rent-to-own, pay-day loan, and refund anticipation services.
• Determine if you are ready to apply for credit.
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Borrowing Basics 7
Agenda and Ground Rules
• 60 – 90 minutes long
• One 10-minute break
• Training methods
• Class participation
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Borrowing Basics 8
Credit
• Credit is money you borrow to pay for things.
• It is also called a loan.
• “Good” credit means making payments on time.
• “Bad” credit means it will be harder to borrow in the future.
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Borrowing Basics 9
Why Credit Is Important
• It can be useful in emergencies.
• It’s more convenient than carrying cash.
• It lets you make large purchases.
• It can affect your ability to get employment, housing, and insurance.
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Borrowing Basics 10
Collateral
Property or another asset you promise to give to the bank if you can’t repay your loan.
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Borrowing Basics 11
Collateral Items
Car Property
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Borrowing Basics 12
Types of Loans
• Consumer installment loans
• Credit cards
• Home loans
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Borrowing Basics 13
Consumer Installment Loan
A loan used to pay for personal expenses:
• Automobile
• Computer
• Furniture
• College tuition
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Borrowing Basics 14
Credit Cards
Give you the ongoing ability to borrow money for:
• Household,
• Family, and
• Personal needs.
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Borrowing Basics 15
Home Loans
• Home purchase loans
• Home refinance loans
• Home equity loans
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Borrowing Basics 16
Practice Exercise – Types of Loans
Instructions:
• Read the description of the purchase to be made.
• Fill in the blank with the name of the most appropriate loan type for that purchase.
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Borrowing Basics 17
The Cost of Credit
• Fees
• Interest
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Borrowing Basics 18
Fees
• Annual maintenance fees
• Service charges
• Late fees
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Borrowing Basics 19
Interest
The money financial institutions charge for letting you use their money.
The rate of interest is either:
• Fixed
• Variable
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Borrowing Basics 20
How Much Does Credit REALLY Cost?
• Amount financed $5,000.00
• APR 12%
• Finance charge $600.00
• Total paid $5,600.00
Watch out for “penalty APRs” and “universal default” on credit cards.
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Borrowing Basics 21
Practice Exercise – Borrowing Money Responsibly
Instructions:
• Read each question carefully.
• Answer the question.
• Be ready to support your answer.
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Borrowing Basics 22
The True Cost of Alternative Financial Services
• Rent-to-own services
• Pay-day loan services
• Refund anticipation services
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Borrowing Basics 23
Rent-to-Own Services
• You use the item by making monthly or weekly payments.
• The store owns the item until you make your final payment.
• Using rent-to-own services is more expensive than getting a consumer installment loan.
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Borrowing Basics 24
Pay-Day Loans
Loans that:• Are made for a fee to people who need
money right away.• Are paid back with the borrower’s next
paycheck.• Are renewed for an additional fee if not
paid off in the agreed-on time period.• Should be used only for emergencies.
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Borrowing Basics 25
Refund Anticipation Loans
• These short-term loans are secured by your income tax refund.
• The money for the loans comes from a bank or finance company.
• They are more costly than you might think.
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Borrowing Basics 26
The “Four Cs” of Credit Decision Making
• Capacity
• Capital
• Character
• Collateral