discussion 3.2
dfresh90
BS-MG353_Week3_Chapter7.ppt
PFIN
5
Using Consumer
Loans
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BILLINGSLEY/ GITMAN/ JOEHNK/
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- Know when to use consumer loans and be able to differentiate between the major types
- Identify the various sources of consumer loans
- Choose the best loans by comparing finance charges, maturity, collateral, and other loan terms
- Describe the features of, and calculate the finance charges on, single-payment loans
LEARNING OBJECTIVES
PFIN5 | CH7
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5 Evaluate the benefits of an installment loan
6 Determine the costs of installment loans and analyze whether it is better to pay cash or to take out a loan
LEARNING OBJECTIVES (continued)
PFIN5 | CH7
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Consumer Loans
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- Formally negotiated contracts that specify the borrowing terms and repayment
- Types
- Auto loans
- Loans for other durable goods
- Education loans
- Personal loans
- Consolidation loans
PFIN5 | CH7
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Exhibit 7.1
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PFIN5 | CH7
Federal Government Student Loan Programs at Glance
Source: http://www.fastweb.com and http://www.staffordloan.com, accessed August 2014.
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Consumer Loans
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PFIN5 | CH7
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Acquiring Consumer Loans
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PFIN5 | CH7
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Managing Credit
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- Finance charges
- Loan maturity
- Total cost of the transaction
- Collateral
- Other loan considerations
- Payment date, prepayment penalties, late fees
PFIN5 | CH7
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Keeping Track of Debt
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- List all outstanding consumer debt
- Include
- Installment loans
- Student loans
- Single-payment loans
- Credit cards
- Revolving credit lines
- Overdraft protection lines
- Home equity credit lines
PFIN5 | CH7
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Single-Payment Loans
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- Repaid in full on a given due date
- Payment consists of principal and interest charges
- Interim interest payments must be made at times
- Payment at maturity = principal + unpaid interest
- Can be secured or unsecured
- Can be taken out for any purpose
PFIN5 | CH7
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Features of the Loan
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PFIN5 | CH7
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Loan Collateral
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- Lien: Legal claim permitting the lender to liquidate the items serving as collateral to satisfy the obligation
- Chattel mortgage: Mortgage on personal property given as security for the payment of an obligation
- Collateral note: Legal note giving the lender the right to sell collateral
PFIN5 | CH7
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Loan Repayment
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- Prepayment penalty: Additional charge you may owe if you decide to pay off your loan prior to maturity
- Loan rollover: Process of paying off a loan by taking out another loan
PFIN5 | CH7
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Calculating Financial Charges
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PFIN5 | CH7
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Simple Interest Method and Annual Percentage Rate
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- Simple interest
- Finance charge = principal loan amount x stated annual interest rate x term of loan
- FS = P x r x t
- Annual percentage rate
- APR = Average annual finance charge Average loan balance outstanding
PFIN5| CH7
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Discount Method
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- Calculates finance charges in which interest is computed and then subtracted from the principal, with the remainder being disbursed to the borrower
- Fd = Fs = P x r x t
- Where,
- Fd = Finance charge calculated using discount method
- Fs = Finance charge calculated using the simple interest method
- P = Principal amount of loan
- r = Stated annual rate of interest
- t = Term of loan
PFIN5 | CH7
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Installment Loans
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- Repaying the debt in a series of installment payments
- Convenient loan repayment
- Types
- Car loans
- Home furnishings
- Appliances
- Entertainment centers
- Camper trailers
PFIN5 | CH7
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Methods of Computing Finance Charges
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PFIN5 | CH7
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Prepayment Penalties
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- Additional charge one may owe if he/she decides to pay off their loan prior to maturity
- Rule of 78s
- Known as sum-of-the-digits method
- Calculating interest that has extra-heavy interest charges in the early months of the loan
PFIN5 | CH7
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Loan or Cash Dilemma
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- Paying cash - Purchase costs more to borrow the money than one can earn in interest
- Loan - Purchase costs less to borrow the money than one can earn in interest
PFIN5 | CH7
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- Consumer loans
- Collateral
- Single-payment loan
- Interim financing
- Installment loan
- Consumer finance company
- Sales finance company
- Captive finance company
- Cash value
- Loan application
- Lien
- Chattel mortgage
- Collateral note
- Prepayment penalty
KEY TERMS
PFIN5 | CH7
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- Loan rollover
- Loan disclosure statement
- Simple interest method
- Discount method
- Add-on method
- Rule of 78s
KEY TERMS
PFIN5/CH7
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SUMMARY
- Consumer loans are important to the personal financial planning process
- Consumer loans can be used for any purpose
- Various sources provide consumer loans
- Single-payment loan and installment loans are types of consumer loans
PFIN5 | CH7
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