Ch.5-9
What are the consumer buying influences?
*Economic Factors *Social Factors *Personal Factors
Personal Consumer Protection
*Follow common sense guidelines on dealing with reputable companies, signing contracts, exaggerated offers, credit vs. cash purchase and rushing to get a deal
Opportunity Costs of Financial Services
- Higher rate of return may be obtained at the cost of lower liquidity (inability to obtain your money quickly) -Convenience of a 24-hr ATM should be considered against service fees - The "no fee" checking account w/ a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6% compounded over 10 yrs.
Mutual Saving Banks
- Specialized in savings accounts and mortgage loans - they are owned by their depositors - mainly located in northeastern U.S.
Inflation
- compare savings rate with inflation rate
3 ways consumers can finance purchases
- draw on their savings -Use present earnings -Borrow against expected future income
Compounding
- more frequent compounding means earning more interest on "interest previously earned"
Rate of Return
- percentage or yield is the increase in value of your savings due to interest -Ex: a $100 savings account that earned $5 has a yield of 5% ($5/$100)
Annual Percentage Yield (APY)
- purpose is to provide consistency when comparing different savings options at different institutions
Tax Consideration
- taxes reduced interest earned on savings - taxes are not withheld from savings and Investments; you may also additional taxes at year-end as a result of earnings on saving
Regular Savings Account
- usually involve below or minimum balance - Credit Unions call them share accounts
Building and maintaining your credit rating
-A good credit is a valuable asset that should be nurtured and protected -Limit your borrowing to your capacity to repay - Live up to the terms of contracts -check to see what is in your credit report
Asset Management Account
-Also called a cash management account or a wealth management account -Offered by investment brokers and financial institutions - Provides a complete financial service programs for a single fee and the benefit s include: *Tracking your money in one location *Fewer monthly and quarterly statement *Lower fees for maintaining a larger balance *Simplified tax reporting w/ 1 1099 form * Ease of communicating your financial situation to family members
Investment Companies
-Are also referred to as Mutual Funds -Offer a money market fund on which you can write a limited number of checks -Accounts are not covered by federal deposit insurance
Phase 4:Postpurchases Activities
-Automobile operation costs -Motor vehicle maintainance -Lemon Laws -Automobile serving services
Selecting a Location
-Be aware a zoning laws -Assess the school system if you have children
Online and Mobile Banking
-Benefits of convenience and saving time along w/ instant information access - Concerns of privacy, security of data,ease of overspending,costly fees, and online scams must also be considered - Traditional Electronic Banking: *Automatic teller machine (also called ATM or a cash machine) offer various transactions * Debit card (also called cash card) used to make purchases w/ your own funds
Managing Daily Money Needs
-Cash, check, credit card, debit card, and online/mobile transfer are the most common payment choices
Financial Services and Economic Conditions
-Changing interest rates, rising consumer and other economic factors also influence financial services - Be aware of current trends and future prospects for interest rates -Read The Wall Street Journal, BusinessWeek, Forbes, Fortune, and other online sources
What if you are denied credit?
-Check your credit file at the credit bureau -If you believe reasons for denial ate invalid: file suit and/or notify federal enforcement agency - Ask the creditor to clarify reason for denial; if you believe the denial is valid...1. Apply to another creditor with different standards 2. Take steps to improve your creditworthiness 3. You have the right to provide a 100 word explanation in your file
Types of Credit
-Closed-end credit -Open-end credit -Credit cards -Smart Cards -Debit Cards -Stored Value (or gift) Cards -Travel and entertainment cards -Smart Phones - Home Equity Loans
Your Rights Under Consumer Credit Laws
-Complain to the creditor and let the creditor know you are aware of the law -File a complaint with the government -If all else fails, sue the creditor in a federal district court
Determing the Home price
-Consider recent selling prices in the area, current demand for housing, the length of time the home has been on the market, the owner's need to sell, financing options, and features of the home
If your identity is stolen, what do you do?
-Contact the fraud department of each of the three major credit bureaus 1. tell them to flag your file with a fraud alert 2. include a statement that creditors should call you for permission before opening any new accounts in your name -Contact creditors to check for accounts that have been tampered with or opened fraudulently -File a police report and keep a copy in case your creditors need proof of the crime -Check www.privacy rights.org - File a complaint with the Federal Trade Commission at 1-877-FTC-HELP
Trade-offs with each alternative
-Depleting savings reduces emergency funds -Spending current income will eventually reduce well-being -Spending future income now reduces funds available for future expences
Legal Details of a Lease
-Description and address of property -Name and address of the owner/landlord (lessor) -Name of tenent(lessee) -Effective date and length of the lease -Amount of security deposit -Amount and due date of rent
Obtain Financing
-Determine the amount of the down payment -Private Mortgage Insurance (PMI) is required if down payment is less than 20% -Investigate the rates,types, and terms of mortgages -Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 33% to 38% of gross income.
Building a home
-Does the contractor have needed experience? -Does contractor have a good working relationship with architects,suppliers,electricians, plumbers,carpenters? -What assurance do you have of the quality of materials -What are the payment arrangements during construction?
Advantages of Renting
-Easier to move (mobility) -Fewer maintenance and repair responsibility -Lower initial costs
Brokerage Firms
-Employment investment advisers and financial planners which serve as agents between the buyer and seller for stocks and bonds
what are opportunity costs of housing choices?
-Interest earnings lost in money used for a down payment a home or the interest on a security deposit for an apartment -Also, time and cost of community to live in an area that offers less costly housing or more space -Renters lose tax advantages and equity growth -Time and money you spend to repair and improve a lower-priced home -Time and effort when you have a home built to your personal specifications
Simple interest on the Declining Balance
-Interest is only paid on the amount of original principal not yet paid -The more frequent your payments, the lower the interest you'll pay
Credit Card Act of 2009
-Limits increases in the APR in the first year -Restricts issuers from charging higher interest rates on existing balances -Teaser rates must be for at least 6 months -Issuers must mail statements at least 21 days before payment is due -Disclosure statement must be clear and timely -Card issuers must post card agreements
Pawnshops
-Make loans on possessions but charge higher fees than other financial institutions; used for quick cash; charge can be to over 100% interest
Finance Companies
-Make short and intermediate term loans to consumers but at higher rates
sources of consumer credit
-Medium-priced loans *commercial banks *Savings and loan associations * Credit unions -Expensive loans *Finance and check cashing companies *Retailers such as car or appliance Bank credit cards and cash advances
Disadvantages of Renting
-No tax benefits -Restrictions regarding pets and decorating -Limits regarding remodeling -Costs including a security deposit,utilities,and renters' insurance
Fair Credit Billing Act
-Notifying creditor of error in writing within 60 days - Include your explanation of the error and your account number to the billing inquiries address -They must respond within 30 days -Credit card company has 2 billing periods but no longer than 90 days to correct your account or tell you why they think the bill is correct - Your credit rating is not affected while item is in dispute
Life Insurance Companies
-Offer insurance plus savings and investment features; recently expanded to offer investment and retirement planning
Phase 1: Preshopping Activities
-Problem identification -Information Gathering
Mortgage Companies
-Provide loans to customers so they can purchase homes
calculating the cost of credit
-Simple interest Interest= principal×rate of interest×time
Types of Housing Available
-Single-Family dwelling -Multiunit dwelling -Condominium -Cooperive housing -Manufacted homes -Mobile homes
Take Legal Action
-Small claims court -Class action suits -Using a lawyer -Other legal alternatives *Legal aid society *Prepaid Legal services
Practical Purchasing Strategies
-Timing Purchases *Be aware if the price varies with the time of the year -Purchase Location *Choice of retailer depends on location, price, product selection *Cooperatives: a non-profit organization;members save money -Brand Comparison -Label information -Price Comparison
Protection Under Consumer Credit Laws
-Truth in Lending and Consumer Leasing Acts -Equal Credit Opportunity Act -Fair Credit Billing Act -Fair Credit Reporting Act -Consumer Credit Reporting Reform Act -Credit Card Accountability, Responsibility and Disclosure Act
Phase 3: Determining Purchase Price
-Used-car price negotiations -Price bargaining for new cars -Comparing financing alternatives
Avoiding and Correcting Credit Mistakes
-You can withhold payment to damaged or shoddy goods or poor services if you have paid for them w/ a credit and if you make a sincere attempt to resolve the problem w/ your creditor
credit unions
-are user-owned,nonprofit, cooperative financial institutions -Surveys report lower fees for checking accounts, lower loan rates, and higher levels of user satisfaction compared to other financial institutions
What does your lifestyle and your choice of housing based on?
-how you spend your time and money affects your housing choice -Personal preference s for housing are modified by financial factors
Advantages of credit
-immediate access to goods and services -Permits purchase even when funds are low -A cushion for financial emergencies -Advance notice of sales -Easier to return merchandise -Convenient when shopping -One monthly payment -Safer than cash -Needed for hotel reservations, car rentals, and shopping online - Can take advantage of float time/grace period -May get rebates, airline miles, extended manufacturer's warranties, or other bonuses - Indicates financial stability
Loans you should seek:
-in expensive loans -Parents or family members -Loans that use your assets as collateral
Wise Online Buying Activities
1. Conduct online research 2.Compare Stores 3.Make Purchase 4. Plan for future purchases
Home Buying Process
1. Determine Home Owenership Needs 2. Find and Evaluate a Property to Purchase 3. Price the Property 4. Obtain Financing 5. Close the Purchase Transaction
Improving credit score
1. Get copies of your credit report-review for accuracy 2. Pay your bills on time 3. Understand how your credit score is determined 4. Learn the legal steps to improve your credit report 5. Beware of the credit-repair scams
Mistakes in managing cash are...
1. Overspending from impulse buying and using credit. 2. Not having enough liquid assets (cash and checking account) to pay current bills. 3. Using savings or borrowing to pay for current expenses 4. Failing to put unneeded funds in an interest-earning savings account or investment program.
Trust
A legal agreement that provides for the management and control of assets by one party for the benefit of another.
Annual Percentage Rate (APR) formula
APR 18% ; Monthly rate 15% Previous balance=$400, Payment= $300 =Finance charge =1.5%×400 =4.05
Deposit Institutions
Commercial Banks -Offers a full range of services including checking, savings, lending and other services. Saving and Loan Associations - offers specialized savings accounts and loans, including mortgages and other financial planning services
Co-signing A Loan
Creditor tells you... -You are being asked to guarantee that debt, so consider if you can afford it if the borrower defaults - If the borrow does not pay, you may have to pay up to the full amount and also any late or collection fees -If a payment is missed the creditor can collect the debt from you w/o first trying to get it from the borrower
Truth in Savings
Requires Disclosure of... - fees on deposit account - interest rate - the annual percentage yield (APY) -Other terms and conditions of the savings plan
what are the steps of choosing a financial institution?
Step 1: Prepare a list of important features Step 2: Rank the top 3 or 4 features for "you" Step 3: Prepare a list of financial institutions Step 4: Conduct research for decision Talk to others who have used their services. Research online the services and fees. Visit the financial institution to meet staff. Step 5: Make decisions where you will do business
Consumer Credit
credit is an arrangement to receive cash, goods or services now, and pay for them in the future - consumer credit is the use of credit for personal Morgan's needs (except a home mortgage)
car title loans
provide loans with automobile title as security for a high interest charge usually over 200%
Check-cashing outlets
-Charge 1-20% of the face value of a check; 2-3% is average cost
Negotiating the Purchase Price
-Counteroffers are common -Earnest money -Contingency clauses, such as buyer must be able to obtain financing, sale contingent on the sale of the buyer's current home
Payday Loans
-Referred to as cash advances, check advance loans, postdated check loans, and delayed deposit loans; charge can be 780% or more
Fair Credit Reporting Act
-Regulates the use of credit reports -requires the deletion of obsolete information -credit card companies must correct inaccurate information -Only authorized persons have access to your report - Adverse data can be reported for even yrs; bankruptcy
Phase 2: Evaluating Alternatives
-Selecting Vehicle Options -Comparing used vehicles -Leasing a vehicle
Disadvantages of credit
-temptation to overspend - failure to repay loan may lead to loss of income -Misuse of credit can create serious long-term financial problems, damage to family relationships, and a slowing of progress toward financial goals -It does not increase total purchasing power -Credit costs money
Types of Financial services
1. Savings; safe storage of funds for future use- Time deposits, savings account and CDs 2. Cash Availability&Payment Services; Demand deposits, checking accounts and other payment methods 3. Borrowing; for the short-term or long-term 4. Investments and other financial services; Insurence, investment, real estate purchases, tax assistance, and financial planning
Housing Rental Activities
1. The Search 2. Before Signing a Lease 3. Living in Rental Property 4. At the End of the Lease
How much can you rent?
No more than 1/3 of your income
Benefits of Home Owernship
-Enjoy the pride of ownership -Financial benefits -Lifestyle flexibility of home ownership
Prepaid Debit Cards
-Fasted growing payment method - Issued by traditional financial institutions, retailers (such as Wal-Mart), and non-bank companies - Major concern is extensive # of fees a user can encounter due to few current regulations for these cards - Benefits include lowering consumer debt by helping to control spending and buying on credit
Drawbacks of Home Ownership
-Financial uncertainty -Limited mobility -Higher living costs
What do you do if you are explaining about Consumer Credit?
-First try to solve the problem directly with the creditor -Or, there are more formal complaint procedures
Warranties
-Full or limited express warranties, usually written -Implied warranty of merchantability guarantees the produce is fit for normal use -Used-car Warranties disclosures must describe warranty if any (otherwise car sold "as is") -New-car warranties include basic parts, power train, and corrosion coverage -Service contracts known as extended "warranties" but are not warranties; more of an insurance policy for a fee
Credit Card Companies
-Fund short-term retail lending
Rent-To-Own Centers
-Lease products to consumers who can only item if they complete a certain number of weekly or monthly payments, cars can be over 300%
Certificates of Deposit s
A savings plan that requires you to leaving the money on deposit for a set time., otherwise you incur penalties - several types choose from - consider all earnings and all the cost before saving with the CD or rolling over a CD (buying a new one at maturity) - consider creating a CD portfolio the CDs maturing at different times(3-month,6-month, 1 yr, 2yrs) - review information at www.bankrate.com
Who provides data to credit bureaus
Bureaus get info from banks, court records, finance companies, credit card companies,merchants, and other creditors
what are the 5 cs creditors look for?
Character-do you pay bills on time? Capacity-Can you repay the loan? Capital-What are your assets and net worth? Collateral- What property do you have to pledge that the lender can repossess if you default on the loan? Conditions-What economic conditions could affect your ability to repay the loan?
Resolving Consumer Complaints and Legal Options for Consumers
Step 1:Initial Communication Step 2: Communication w/the company Step 3: Consumer Agency Assistance Step 4: Legal Action
What does a real estate agent do?
They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing.
Rent contract
the lease
Debt To Equity Ratio
total liabilities÷Net Worth = should be <1
Debit Payments-to-Income Ratio
your monthly debt payments÷net monthly income
