Module 2 Borrowing Basics

Overview of Credit: ● Credit: the ability to borrow money now, and pay it back later ● Loan: Money that you borrow from a lender and promise to pay back on a set schedule ● Interest: the extra amount of money that serves as your cost to borrow money ● Before borrowing money, make sure the loan payments fit into your spending plan Collateral and Guarantees: ● Collateral: something you provide the lender to secure a loan ○ Ex. you pledge an asset (car) to the lender to secure the loan ■ If you do not repay the loan, the lender can take the asset and sell it to repay part/all of your loan ● Guarantee: a form of collateral ○ Ex. co-signing (co-signer is equally responsible for the loan as the person applying for the loan) ● Secured Loan: the borrower pledges (gives) collateral to the lender for the loan ○ Ex. ● Unsecured Loan: unsecured loan is not backed by collateral ○ Ex. student loans, credit cards ● Asset: something valuable that you own, like a car, savings accounts, and property such as your home ○ Some items generally cannot be used as collateral unless they are used to secure the purchase of that item itself ■ Furniture ■ Clothing ■ Kitchenware ● Home Purchase Loan: made for the purpose of buying a home ○ Secured by the home you are buying (so you can lose the home if you do not repay the loan as agreed) ● Home Refinancing: replaces an existing home loan by paying it in full and replacing it with a new home loan ○ Cash-out refinance loan allows you to borrow more money than is owed on the loan being replaced ○ Refinance home loans to obtain lower interest rate, get money for home repairs, or for other personal needs (i.e. investments) ● Home Equity: the current market value of your home minus what you owe (your mortgage loan balance) for the house ○ Allow you to borrow money that is secured by your home ○ Two types: ■ One-time loan for a lump sum, typically at a fixed interest rate (home improvement loans) ■ Home equity line of credit works like a credit card: ● Borrow as much money as you want up to a pre-set limit ● Interest rate for a line of credit is usually variable ● Consumer Installment Loans: Used to pay for purchases and other expenses for you and your family ○ Ex. auto loan ■ Car is used as collateral ■ Consumer installment loan allows you to borrow a fixed sum of money and pay it back in equal installments over a period of time ● Credit Cards: buy things and pay for them later ○ Give you the ongoing ability to borrow money for household. Family, and other personal expenses ○ If you are not careful in spending, you can fall into credit card debt ○ Make sure that you are able to make your minimum monthly payment on your credit card bill ● Fees: ○ May be charged by financial institutions for activities such as reviewing your loan application ○ May be penalty fee if you violate the terms of a loan agreement ■ Ex. late fees ○ Credit card fees: annual maintenance fees, service fees for cash advance ● Interest: the amount of money a financial institution charges for letting you use its money ○ Fixed rate: generally stay the same throughout the term of the loan ○ Variable rate: might change during the loan term ■ Loan agreement will show details of rate changes Truth and Lending Disclosure Statement: ● Closed End Loan: ○ Annual Percentage Rate (APR) ○ Amount financed ○ Finance charge ○ Fees ○ Total of the payments ● ● ● ● ● Alternative Financial Services: ○ Rent-to-own services ○ Payday loan services ○ Refund anticipation services Short-term loans: ○ Pawn Shops ○ Car title lenders (for a loan secured by the borrower’s car) ○ Payday lenders (for unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment) When you need money fast, borrow from yourself ○ Start an emergency savings account Comparison shop for loans The Four C’s for applying for credit: ○ ○ ○ ○ Capacity: your present and future ability to make your payments Capital: the value of your assets and your net worth Character: how you have paid your bills or debts in the past Collateral: property or assets offered to secure the loan