sources of credit and credit alternatives

8/13/2019 Sources of Credit and Credit Alternatives

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PERSONAL FINANCIALPLANNING

FINANCIAL SERVICESFINANCIAL INSTITUTIONS


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Post Office Monthly Income Scheme

Provides monthly income @ 8% p.a. On completion of six years, you get a 10 percent bonus on the principal.Offers better liquidity as you have an exitoption after one year from the investmentdate.


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National Savings Certificates

An assured return scheme

Provides for tax rebates under section 80C.

Pays interest at 8 per cent for a duration of 6years, which is

relatively lower compared to other small saving schemes

Low liquidity and premature withdrawals can be done only

under specific circumstances, such as the death of the

holder(s), forfeiture by the nominee, or under court's order.


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KISAN VIKAS PATRA

Another fixed income schemeIt doubles your money in eight years and sevenmonths.

No benefits under the Income Tax Act.In terms of liquidity, the scheme is better than thePPF and NSC. You can exit the scheme any time

after two and a half years from the investmentdate, though you will forfeit the interest earned forthe invested time period.


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FINANCIAL SERVICES TYPES

Divided into 4 categories:

1. SAVINGS

2. PAYMENT SERVICES

DDs, Cheques, Online Transaction

3. BORROWINGS

Credit cards, Cash loans

4.OTHER FINANCIAL SERVICES

Insurance protection, investment for future, Mutual Funds, Tax

assistance, etc.


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FINANCIAL SERVICES TYPES

INSURANCE

A contract where one party agrees to pay for another party's financial

loss resulting from a specified event (for example, a collision, theft, or

storm damage).

MUTUAL FUND

Enables investors to pool their money & place it under professionalinvestment management. The portfolio manager trades the funds

underlying asset.


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TYPES OF FINANCIAL INSTITUTIONS

Central BankFormulation of rates

Commercial banksAcceptance of deposits, lending

Credit Rating Agencies in IndiaCRISIL ,ICRA

SEBIProtects investors interest, facilitate functioning ofmarket intermediaries

Insurance companiesOffer protection against losses


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CONSUMER CREDIT?

What is Consumer Credit?What are the uses of using credit?

What is the trade off?Misuse of Credit Card?

What questions that you should ask to yourself before youmake a major purchase?


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Slide 2 - The Five Cs of CreditLesson Reference: Credit, Activity 1 Overhead 1

THE FIVE Cs OF CREDIT

C = CapacityC = Capital

C = Collateral

C = Conditions

C = Character

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WHEN TO USE CREDIT

Can you describe a situation when it isa good time to use credit and when it isNOT a good time to use credit?

Slide 3 When to Use CreditLesson Reference: Credit, Activity 1 Handout 211


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Who uses Credit?

Consumer CreditCredit used by people for personalreasons.

Commercial Credit

Credit used by businesses.

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Types of CreditCharge Accounts most common type of short-

term or medium-term credit.Regular Charge Accounts

Require that you pay for purchases in full

within a certain period of time.Revolving Charge Accounts

Allows you to borrow or charge up to a certainamount of money (credit limit) and pay back apart or the entire balance each month.

Budget Charge AccountsAllows you to pay for costly items in equal

payments spread out over a period of time.


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Credit CardsSingle-Purpose

Can only be used to buy goods or services at the businessthat issued the card.Examples: JC Penney, Sears

MultipurposeSimilar to a revolving charge account.May be used at several locations.Examples: Visa and Master Card

Travel and EntertainmentSimilar to regular charge accounts.Must be paid in full each month.Example: American Express


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Banks and Other FinancialInstitutions

Single Payment LoanDebtor pays off loan in one payment.Promissory Note

Written promise to repay with interest.

Installment LoanRepaid in regular payments.


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Installment LoansTypes:

Student, mortgage, automobile, etc.

Secured vs. UnsecuredSecured loans are backed by collateral (help guarantee therepayment of a loan).

Closed vs. Open EndedClosed-end credit is used for a specific purpose and involvesa definite amount of money.

Open-end credit gives you a certain limit on the amount ofmoney you can borrow.

CosignerResponsible for the repayment of a loan if the original party

does not pay.


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Consumer FinanceCompanies

Specialize in loans to people with poorcredit ratings.The cost of credit is higher than otherinstitutions.


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Bonds

Bonds written promise to repay a loan withinterest on a specific date. The buyer of the bond isconsidered the creditor.

Corporate BondsUsually used to finance buildings and equipment.

Municipal BondsState and local governments use these to finance projects.

Savings BondsSold by federal government.


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Other Sources of Credit forBusinesses

Small Business AdministrationOffers a number of financial, technical, andmanagement programs to help businesses.

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Other Sources of Credit forConsumers

Life Insurance PlansCash Value Insurance

Provides both savings and death benefits.

Retirement Plans

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Why Use Credit?

ConvenienceShop without carrying cash.

Immediate PossessionAllows you to have possession on the goods orservices now.

EmergenciesHelps in case of a serious situation.

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AdvantagesImmediate PossessionConvenience

Buy now and pay later.

EmergenciesSaving MoneyBuy an item while it is on sale.

Credit RatingEstablish a favorable credit rating.

Growth of the EconomyBuying goods will help the economy expand.

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DisadvantagesOverbuyingMost common hazard.

Careless BuyingComparison shopping may not be a priorityEncourages impulse buying

Higher PricesSome stores offer discounts for cash sales.

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Disadvantages continuedOveruse of Credit

Too much is owed unable to pay back.Credit Fees

Interest paid on balance

Habit Forming

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Results of Overuse

Garnishment of WagesMoney deducted from wages for money owed.

RepossessionLoss of property because of failure to repayloan.

Bankruptcy

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Process of ObtainingCredit

1. Credit Application2. Documentation3. Processing4. Underwriting5. Closing6. Funding

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Credit Application

Form on which you provide informationneeded by a lender to make a decision aboutgranting credit or approving a loan.Provide the following information:

Salary, Employer, Outstanding Credit (Debt),Assets, Credit References, Checking and

Savings Accounts, Stock Portfolio, etc.

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DocumentationCreditor will collect and verify necessarydocumentation for the extension of credit.

Examples: Bank statements, credit cardstatements, past W- 2s, etc.

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Processing

Building of loan file.Evaluating credit worthiness.

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Credit Worthiness Terms(Processing)

The Cs of Credit Worthiness Capacity

Your ability to pay (income)Character

Earned by paying bills on time and being a trustworthy,reliable, stable person.References people you have borrowed from in the past.

CollateralSecurity to help guarantee that the creditor will be repaid.

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re or ness erms(Processing) continued

Credit HistoryIndicates the amount of debt you have and your paymenthistory.

CapitalHow much you have beyond what you owe.Credit Limit

Maximum amount you can borrow.

CosignerResponsible for a loan if you, the original debtor, do notpay.

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Underwriting

Reviewing loan for soundness.Consumer Reporting Agencies

Company that compiles and keeps records onconsumer payment habits.Used to evaluate creditworthiness.

Examples: Equifax, Experian, andTransUnion.

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Closing

Representative explains terms of credit.Debtor signs appropriate forms.

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FundingCreditor will issue credit/funds to thedebtor.

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sources of credit and credit alternatives

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