CHAPTER 7 USING CONSUMER LOANS.ppt

Chapter 7 CHAPTER 7: USING CONSUMER LOANS Consumer Loans Formal, negotiated contracts Specify the terms for borrowing Specify the repayment schedule One-time transaction Normally used to pay for big-ticket items Types of Consumer Loans Auto Durable goods Education loans Personal loans Consolidation loans Student Loans Federally sponsored loans: Stafford loans (Direct Federal Family Education Loans—FFEL) Perkins loans Supplemental Loans for Students (SLS) Parent Loans (PLUS) Obtaining a Student Loan: Demonstrate financial need Make satisfactory progress in school No defaults on other student loans! Repaying Student Loans Low interest rates With Stafford Perkins loans — interest doesn’t accrue until you’re out! Consolidate your loans and repay: Extended repayment plan Graduated repayment schedule Income-contingent repayment plan Don’t default! Repaying Consumer Loans Single Payment or Installment Fixed or Variable Interest Rate Where Can You Get Consumer Loans? Traditional financial institutions Commercial banks Credit Unions Savings and Loan Associations Consumer finance companies Specialize in high-risk borrowers Together with banks and credit unions make ~75% of consumer loans Other sources include: Sales finance companies Third party financing Include captive finance companies, such as GMAC Life insurance companies Loan against cash value of certain types of policies Friends and relatives Pawn shops Managing Your Credit Shop carefully before borrowing Compare loan features Finance charges and loan maturity Total cost of transaction Collateral requirements Other features, such as payment date, prepayment penalties and late fees Low Rate or a Rebate? Example: buying a new car with a price of $20,000, with two financing options: 1.9% financing (60 months) from car dealer $2,500 rebate, then 10% (60 months) financing from your bank Which option should you choose? Keep Track of Your Credit! Keep inventory sheet of debt Know total mon