Chapter 7 Planned Borrowing.ppt

* Chapter 7: Planned Borrowing Objectives Discuss the elements of the planned use of credit. Establish your own debt limit. Understand the language of consumer loans. Describe the sources of consumer loans. Objectives Calculate the APR and finance charges on both single-payment and installment loans. Recognize signs of over-indebtedness, know what to do when it occurs, and explain your rights regarding credit collection and bankruptcy. Planned Borrowing Most people use installment credit 12+ times during their life. Yet, only 1:3 shop for credit terms! DID YOU KNOW! Planned Borrowing A knowing decision to borrow to finance a purchase or simply to borrow cash. Planning Your Credit Usage When How often How much THE TASK OF DETERMINING: The debt limit most people establish for themselves is lower than what lenders would be willing to lend. Establishing a Debt Limit Debt-payments-to-disposable-income method Ratio of debt-to-equity method Continuous-debt method Establishing a Debt Limit Credit Capacity Indicators *Not including housing Debt Payments-to-Income Ratio monthly payments* monthly after tax income 6-9 Credit Capacity Indicators Debt To Equity Ratio total liabilities net worth* = Should be 1 *Excluding home value 6-10 Debt-Payment Limits as a Percentage of Disposable Income Percent For Current Debt* Take on Additional Debt? 10 or less Safe limit; borrower feels little debt pressure. Could be undertaken cautiously. 11 to 15 Possibly safe limit; borrower feels some pressure. Should not be undertaken. 16 to 20 Fully extended; borrower hopes that no emergency arises. Only the fearless or foolhardy ask for more. 21 to 25 Overextended; borrower worries about debt No, borrower should see a credit counselor. * Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives. If one of the earners reduces/eliminates earnings, debts that had been manageable with two incomes may become overwhelming. Setting Debt