section 6.2 notes. can you afford a loan? first way to tell second way to tell
TRANSCRIPT
PERSONAL FINANCESection 6.2 Notes
Can you afford a loan?
First way to tell
Second way to tell
Debt to Income Ratio
Net Income
Debt to Income Ratio
Debt to Income Ratio
Your monthly net income is $1,200. Your monthly debts include your student loan payment and a gas credit card, and they total $180. What is your debt payments to income ratio?
The Cost of Credit
If you are thinking of getting a loan…
Two key factors to consider..
Finance Charge and APR
The finance charge is the total dollar amount you pay to use credit.
The finance charge is calculated using the APR which is…
Tackling the Trade Offs
Term vs Interest Costs
APR Term Monthly Payment
Finance Charges
Total Cost
Creditor A
14% 3 Years $205.07 $1,382.52
$7,382.52
Creditor B
14% 4 Years $163.96 $1870.08 $7,870.08
Lender Risk vs Interest Rate The lender’s goal is to reduce their
risk or make sure you pay back the loan
Options Variable Interest Rate Loans
Lender Risk vs Interest Rate Secured Loan
Up Front Cash
Lender Risk vs Interest Rate Shorter Term
Calculating the Cost of Credit Simple Interest Loans
The interest computed only on the principal or the amount of money that you borrow.
Based on three factors
Janelle’s cousin agreed to lend her $1000 to purchase a used laptop computer. She has agreed to charge only 5% simple interest, and Janelle has agreed to pay the loan back at the end of one year. How much interest will she pay for the year?
Formula: Principal x Interest Rate X Term
Calculating the Cost of Credit
Your just bought a used car for $3,500 from your aunt. She agreed to let you make payments for 3 years with simple interest at 6%. How much interest will you pay?
Principal x Interest Rate x Term
Calculating the Cost of Credit
Calculating the Cost of Credit Simple Interest on Declining Balance
When a simple interest loan is paid back in more than one payment, the method of computing interest is known as the declining balance method.
Add-On Interest Interest is calculated on the full amount
of the original principal, no matter how often you make payments.
Calculating the Cost of Credit
Cost of Credit and Expected Inflation
Calculating the Cost of Credit
Minimum Monthly Payment Trap
Calculating the Cost of Credit
Minimum Monthly Payment Trap
Calculating the Cost of Credit
The Five C’s of Credit
Character: Will You Repay the Loan?
Capacity: Can You Repay the Loan?
Capital: What are your Assets and Net Worth?
Collateral: What if you do not repay?
The Five C’s of Credit
Credit History: What is your credit history? Do you pay your bills on time? Have you ever filed for bankruptcy? Credit Rating
The Five C’s of Credit
Assignment
6.2 Assessment Numbers 1, 2, 3, 4, 5
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