Introduction. Purpose. Student Introductions. Objectives (Continued) Objectives

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2 Introduction Instructor and student introductions Module overview Borrowing Basics 1 Borrowing Basics 2 Your name Student Introductions Expectations, questions, and concerns about borrowing money Purpose Borrowing Basics: Describes how credit works and the types of credit available. Helps you determine if you are ready to apply for credit. Borrowing Basics 3 Borrowing Basics 4 Objectives By the end of this course, you will be able to: Define credit. Explain why credit is important. Distinguish between secured and unsecured loans. Identify three types of loans. Objectives (Continued) Identify the costs associated with getting a loan. Explain why it is important to be wary of rent-to-own, pay-day loan, and refund anticipation services. Determine if you are ready to apply for credit. Borrowing Basics 5 Borrowing Basics 6 Borrowing Basics 1

3 Agenda and Ground Rules minutes long One 10-minute break Training methods Class participation Credit Credit is money you borrow to pay for things. It is also called a loan. Good credit means making payments on time. Bad credit means it will be harder to borrow in the future. Borrowing Basics 7 Borrowing Basics 8 Why Credit Is Important It can be useful in emergencies. It s more convenient than carrying cash. It lets you make large purchases. It can affect your ability to get employment, housing, and insurance. Collateral Property or another asset you promise to give to the bank if you can t repay your loan. Borrowing Basics 9 Borrowing Basics 10 Collateral Items Types of Loans Consumer installment loans Credit cards Home loans Car Property Borrowing Basics 11 Borrowing Basics 12 Borrowing Basics 2

4 Consumer Installment Loan A loan used to pay for personal expenses: Automobile Computer Furniture College tuition Credit Cards Give you the ongoing ability to borrow money for: Household, Family, and Personal needs. Borrowing Basics 13 Borrowing Basics 14 Home Loans Home purchase loans Home refinance loans Home equity loans Practice Exercise Types of Loans Instructions: Read the description of the purchase to be made. Fill in the blank with the name of the most appropriate loan type for that purchase. Borrowing Basics 15 Borrowing Basics 16 Fees Interest The Cost of Credit Fees Annual maintenance fees Service charges Late fees Borrowing Basics 17 Borrowing Basics 18 Borrowing Basics 3

5 Interest The money financial institutions charge for letting you use their money. The rate of interest is either: Fixed Variable How Much Does Credit REALLY Cost? Amount financed $5, APR 12% Finance charge $ Total paid $5, Watch out for penalty APRs and universal default on credit cards. Borrowing Basics 19 Borrowing Basics 20 Practice Exercise Borrowing Money Responsibly Instructions: Read each question carefully. Answer the question. Be ready to support your answer. The True Cost of Alternative Financial Services Rent-to-own services Pay-day loan services Refund anticipation services Borrowing Basics 21 Borrowing Basics 22 Rent-to-Own Services You use the item by making monthly or weekly payments. The store owns the item until you make your final payment. Using rent-to-own services is more expensive than getting a consumer installment loan. Pay-Day Loans Loans that: Are made for a fee to people who need money right away. Are paid back with the borrower s next paycheck. Are renewed for an additional fee if not paid off in the agreed-on time period. Should be used only for emergencies. Borrowing Basics 23 Borrowing Basics 24 Borrowing Basics 4

6 Refund Anticipation Loans These short-term loans are secured by your income tax refund. The money for the loans comes from a bank or finance company. They are more costly than you might think. Capacity Capital Character Collateral The Four Cs of Credit Decision Making Borrowing Basics 25 Borrowing Basics 26 Borrowing Basics 5