Chapter 4 Debt. Section Credit misdirection

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1 Chapter 4 Debt Section Credit misdirection

2 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

3 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.

4 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.

5 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

6 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 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.

7 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.

8 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?

9 Chapter 4 Debt Section and 2.3 Car Loan Truth

10 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.

11 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.

12 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 Up-Font Cost Monthly Payments Mileage 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. Includes first month s payment, refundable security deposit, down payment, taxes, registration and fees. 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. 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 months), you ll have to finance the purchase of the car or lease or buy another one.

13 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 Up-Font Cost Monthly Payments Mileage You own the vehicle and get to keep it as long as you want it. Cost include the cash price or a down payment, taxes, registration and fees. 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. 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 months), you have no further payments and you have built equity to help pay for your next vehicle.

14 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

15 Chapter 4 Debt Section Buying a House

16 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.

17 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.

18 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

19 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.

20 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.

21 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.

22 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

23 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

24 Chapter 4 Debt Section Credit Cards 2.6 Debt vs. Wealth Building

25 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

26 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.

27 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.

28 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.

29 Quiz Wednesday Chapter 4 Sections 1 and 2