Chapter 4 Debt

Section 2 2.1 Credit misdirection

Credit Misdirection

❖ Lending money to friends or family members is a bad idea. It will

strain relationships and in some cases ruin friendships. If you have the

money and want to help, just give it to them.

❖ What is Predatory Lending?

❖ These are money lending companies that take advantage of lower

income people with extremely high interest rates, fees, and

unethical debt collection practices.

❖ Why are people drawn to predatory lending companies?

❖ Need and they offer fast cash.

❖ Examples: Pay day lending, title loan establishments

How does it Work

❖ Payday Loans-Very easy

❖ Application Process-Normally over the phone or

online. (Recent pay stubs, ID and title needed on site)

❖ Appraisal done on your vehicle and title collected.

❖ Cash received by customer.

❖ Take a look at the terms.

Credit Misdirection

❖ Truth about predatory lending (cash advance or payday lending and rent to own)

❖ Marketed as services to help lower income people get ahead.

❖ In the U.S., 12 million people borrow nearly $50 billion a year through payday loans.

❖ The rates charged on payday loans can be up to 35 times those charged on credit card loans and 80 times the rates charged on home mortgages and auto loans.

❖ Most borrowers owe payday lenders for five months out of the year and typically end up paying $800 for a $300 loan.

❖ The estimated annual percentage rate on payday loans in the U.S. ranges from a low of 196% in Minnesota to a high of 574% in both Mississippi and Wisconsin.

❖ Payday loan stores tend to aggregate in areas with higher rates of poverty. The six counties in California with the highest number of payday lender stores per 100,000 people have an average per capita income of between $17,986 and $26,300, compared to the statewide average of $44,980.

Co-Signing

❖ The act of signing for another person's debt which

involves a legal obligation made by the cosigner to make

payment on the other person's debt should that person

default. Having a cosigner is way for individuals with a

low income or poor/limited credit history to obtain

financing.

❖ All Risk and very little to no reward

Credit Misdirection

❖ Lottery and other forms of gambling=bad idea.

❖ Lottery is actually a “tax on the poor”. On average the majority of lottery participants are those without a high school diploma. In Texas those people on average spent $173 a month playing the lottery vs. $49 spent on average by the college graduate that plays.

❖ The average American loses $400 per year to gambling. Gambling has ruined peoples lives, marriages and families. 2010-125 billion dollars reported gross profits. Very profitable industry for a reason.

❖ In 2015 Americans spent over 70 billion dollars on the lottery. People spent more money playing the lottery last year than on books, video games, and tickets for movies and sporting events combined.

What's the Difference

❖ Secured Loans: Loans that have some sort of collateral or

asset attached to them. Normally have a lower interest rate,

better terms and quicker access to cash because of less risk for

the bank. Normally can choose between loan or line of credit.

Examples: Mortgage, car loan, boat loan, jewelry loan.

❖ Unsecured Loans: Loans that are obtained and backed only by

the borrowers credit worthiness, rather than collateral. Have

higher interest rates and a much different fee structure because

of the risk the bank is taking on. Examples: Student loan,

credit card, personal loan.

Credit Myths Discussion

❖ Explain why co-signing a loan is never a good idea?

❖ What are some of the major differences in secured and unsecured debt?

❖ What is meant by the term predatory lending? Describe some of the characteristics of these establishments.

❖ Winning the lottery and winning with money are mutually exclusive. Studies show that most people who suddenly receive a large sum of money (like the lottery) will lose it all within just a few years. What might be a possible explanation for this fact?

❖ http://time.com/4176128/powerball-jackpot-lottery-winners/

Chapter 4 Debt

Section 2 2.2 and 2.3 Car Loan Truth

Car Loan Truth

❖ Societal Myth

❖ Car payments are a way of life?

❖ Three huge ways you lose with car payments. (Average $475 per month in America)

❖ Payments over any period of time hinders your ability to build wealth

❖ Interest. You will pay more than you borrow, On average $3-5K

❖ Depreciation. $20K worth $8k 4 years later and you still are paying for it in most cases.

Car Loan Truth

❖ What does it mean to be upside down on your credit

(car) purchase?

❖ Means that you owe more than what the product

(car) is worth

❖ Leasing (long term rental agreement) your car is a smart

way to purchase your cars?

❖ Most expensive way to purchase a car and the most

profitable form of business for most car

dealerships.

Car Purchase vs. Car Lease

❖ Car Leasing

❖ Car Lease Terms $29,095 plus TT&L.

❖ 36K Mile Term.

❖ TT&L Due at Signing

❖ Payment=$396 month for 36 months

❖ Total Payment for Leasing car=$14,256

❖ Option to buy at end of lease terms

Ownership You do not own the vehicle. You get to use

it but must return at the end of the lease

unless you decide to buy it.

Up-Font Cost Includes first month’s payment, refundable

security deposit, down payment, taxes,

registration and fees.

Monthly

Payments

Lease payments are normally lower that

purchase payments because you are only

paying for the depreciation of the vehicle,

interest charges (called rent charges),

taxes and fees.

Mileage Majority of lease options limit the number of

miles you may drive, often 12,000 to 15,000

per year. You will have to pay charges for

exceeding your limits.

End of Term At the end of the lease (typically 36-48

months), you’ll have to finance the

purchase of the car or lease or buy another

one.

Car Purchase vs. Car Lease

❖ Car Purchase

❖ Cash Purchase $29,095 plus

tax, title and license.

❖ Car Finance Purchase

$29,095 plus TT&L

❖ 10 percent down payment,

5.9% APR and 72 months

terms.

❖ Payment=$441 month

❖ Total Payment for

car=$34712

Ownership You own the vehicle and get to keep it as

long as you want it.

Up-Font Cost Cost include the cash price or a down

payment, taxes, registration and fees.

Monthly

Payments

Loan payments are usually higher than

lease payments because you are paying off

the entire purchase price of the vehicle,

plus interest and other finance charges,

taxes, and fees.

Mileage You are free to drive as many miles as you

want. Higher mileage vehicles depreciate

faster and have a lower trade-in or resale

value.

End of Term At the end of the loan term (usually 48-60

months), you have no further payments and

you have built equity to help pay for your

next vehicle.

Car Loan Option

❖ Drive Free Method

❖ Use the average car payment in America $475. Instead of making those

payments to the bank or car dealer, pay yourself instead. Then pay cash for

your car. Do it again and combine your savings with the value of your first

car. That's a major upgrade in car without owing the bank a dime.

Continue this plan of paying yourself the car note and invest them money.

The interest that you earn over time will help pay for if not completely pay

for your cars for the rest of your life. Something to think about.

❖ Complete Drive Free Activity

Chapter 4 Debt

Section 2 2.4 Buying a House

Home Buying

❖ Biggest Investment and Purchase most people will ever

make.

❖ Three out of four homeowners say their home is their

biggest source of wealth. Understand that your house

is not just a place to live, but also an investment in

your future.

❖ Homes build equity and are investments.

❖ Understand the investment you are making before you

make. Do your homework and use a realtor.

Buying a House ❖ If you can't pay cash which may be hard to do plan for a down payment of at least

20-25%. This will:

❖ Lower payment. Allows you to avoid an escrow account.

❖ Increase odds of getting a better interest rate

❖ Eliminate PMI (Private mortgage insurance) protects the lender not you if

you stop paying on your loan.

❖ Most mortgages require 3-10% down.

❖ 15 or 30 year Mortgage

❖ Saves you interest and time. Example pp. 85

❖ Make sure you get a fixed interest rate on your home loan.

❖ Interest rate is set when you take out the loan and will not change. Therefore

your monthly payment will never change.

Types of Mortgages

❖ FHA Loan-US Federal Housing Administration mortgage

insurance backed mortgage loan.

❖ A low minimum down payment (currently 3.5%)

❖ Reasonable credit expectations-670 or higher

❖ Must have low debt to income ratio

❖ Limit on the amount of home you can purchase-

250,000.00

Types of Mortgages

❖ Conventional Loan-Conventional loans are plain home loans. They are good home loans for borrowers with good to excellent credit. They follow fairly conservative guidelines.

❖ Down payment of 5% or more.

❖ Higher credit score expectations-690 or higher.

❖ Must have low debt to income ratio

❖ Limit to the amount of home you can purchase is much higher. Depending on income and the above.

❖ Mortgages to Avoid:

❖Variable rate mortgage

❖ They will start with a lower rate which may stay the same for

months and or years. But when the introductory period is over

your rate will change and go up and the amount of your monthly

payment will go up.

❖ARM (adjustable rate mortgage)

❖ Interest rate changes based on market and economic conditions.

Lender normally offers lower rate up front to allow borrower to

qualify for more home than they can afford. Problem is when

economy changes or market crashes as it did in 2008 your rate

adjust higher and it quickly becomes more than you can afford.

❖Reverse Mortgages

❖When a homeowner borrows against the equity in their home and

obtains monthly tax free payments from the lender.

Home Buying Tips

❖ Can I make at least a 10-20% down payment

❖ Can I afford a 15-year fixed rate loan

❖ Can I keep the monthly payments at or below 25% of my monthly take home pay

❖ Stretching to get into a home you can’t afford is a bad idea

❖ Prepare for closing cost: These costs include appraisal costs, inspection costs, application fees for your mortgage loan, a title search and various other expenses. Most of these are based on the price of your home. You can negotiate them.

Hidden Cost of Homeownership ❖ Cost associated with homeownership:

❖ Taxes (Nicer the neighborhood the higher the taxes)

❖ Maintenance (stuff will break)

❖ Homeowner Association Fees (Nicer the neighborhood the higher the fees)

❖ Insurance (Fire, Flood, Close to the coast windstorm)

❖ Home Security

❖ Cable Electricity (cooling and Heating)

❖ Water

❖ Gas

❖ Trash Pick-up

❖ Yard Maintenance

Home Buying Process

❖ Step 1: Start Your Research Early. How?

❖ Step 2: Determine How Much House You Can Afford

❖ Step 3: Get Preapproved for credit for Your Mortgage

❖ Step 4: Find the Right Real Estate Agent

❖ Step 5: Shop for Your Home and Make an Offer

❖ Step 6: Get a Home Inspection

❖ Step 7: Work with a Mortgage Banker to Select Your Loan

❖ Step 8: Have the Home Appraised

❖ Step 9: Coordinate the Paperwork

❖ Step 10: Close the Sale

Chapter 4 Debt

Section 2 2.5 Credit Cards

2.6 Debt vs. Wealth Building

Things to know

❖ Your income is your largest wealth building tool. Don’t tie it up with debt.

❖ Some ways out of debt:

❖ Quit borrowing money

❖ You must save money

❖ Sell something

❖ Get a part time job or work overtime (temporarily)

❖ Use the debt snowball method to get out of debt

What is Debt Snowball

❖ List your debts in order from smallest to largest. Pay

minimum payments on all your debts except for the

smallest one, and spend any extra income on it. Every

extra dollar you come across should be thrown at the

smallest debt until its gone. Then attack the second one.

Every-time you pay off a debt, you add its old minimum

payment to your next debt payments.

What If You Can't Pay

❖ Foreclosure-Process by which the holder of a mortgage sells the property of a

homeowner who has not made interest and/or principal payments on time as

stipulated in the mortgage contract

❖ Repossession-Process of a lender taking something back (like a car) for failure to

make a payments.

❖ Bankruptcy-A legal procedure for dealing with debt when an individual or

business cannot repay what he owes.

❖ Garnishment-A court ordered attachment that allows a lender to take monies

owed directly from a borrowers pay check. Only allowed as part of a court

judgment.

❖ Surrender of Collateral-In a bankruptcy proceeding a debtor can give up property

to the creditor in exchange for a 0$ balance.

❖ Delinquency-Borrower not being current on his or her payments.

Critical Thinking Activity

❖ Credit is being marketed to you all the time. Locate

three credit advertisements (i.e., car loans, credit cards,

title pawns, etc.). Write three statements for each ad

that either refute a claim or point out a negative reality

of the debt product that the ad fails to reveal.

Quiz Wednesday

❖ Chapter 4 Sections 1 and 2