FINN Chapter 9 (FINAL)
Alternatives to payday loans
Friends, family members, credit cards
The Limited-Debt Solution
short term loan (1 year or less) they may limit these purchases to what they can afford to pay off when they receive the credit card bill each month. The payments on a short-term loan (such as one year) would be much higher than the payments on a four-year car loan, so this would reduce the amount that they could spend on the car. However, this restriction might be beneficial because it prevents them from spending an excessive amount of money on the car.
Financial Institutions
- most common source for receiving loans -Commercial banks, savings institutions, and credit unions provide personal loans - They pool the deposited funds that they receive from savers to create loans for borrowers. - Finance companies also provide personal loans. Some finance companies are subsidiaries of automobile manufacturers that finance car purchases. ???????????
debt consolidation
- taking out a single loan to pay off multiple debts can simplify your financial situation and record keeping because you only have to pay one bill each month instead of several, and you sometimes can save money because the interest rate may be lower than the rates you were paying before on the various debts. - Obtaining a personal loan is a popular way to consolidate debt, but there are several other ways such as transferring debt to a 0% or low interest rate credit card or obtaining a home equity loan Be wary of so-called debt consolidation companies - Some are legitimate finance companies that offer basic debt consolidation loans, but others are debt settlement companies that claim that they will negotiate with your creditors and persuade them to forgive part or all of your debt. these companies charge large upfront fees, but you can generally accomplish as much as they can by calling your creditors yourself
loan repayment schedule
-Amortize: to repay the principal of a loan through a series of equal payments -Each payment includes part of the principal and part of the interest - As more of the principal is paid down, the amount of interest is reduced, and a larger portion of the payment is used to repay principal.
Impact of the Economy on the Credit Limit
-as economic conditions change, so does the value of a home -market values of homes may decline substantially, leaving no equity in the home -Consequently, there is no collateral that could be used to back a loan, and homeowners will not be able to obtain a home equity loan under these conditions. - When the economy improves, job opportunities improve, consumers receive more income, and they increase their demand for homes
Reasons to avoid payday loans
-using your next paycheck to cover the loan may make you unable to cover your normal purchases -cost of financing is outrageous The payday loan firms are able to charge excessive rates because some people who need money quickly may not be creditworthy and therefore have difficulty obtaining funds from other sources.
Federal Student Loans
4 types: - Direct Subsidized Loans, which are based on financial need. - Direct Unsubsidized Loans, which are not based on financial need, so everyone is eligible. - Direct PLUS Loans, which are made to graduate students and parents of dependent undergraduates to help pay expenses not covered by other financial aid. - Direct Consolidation Loans, which allow you to combine all of your federal student loans into one loan. An important difference between the subsidized and unsubsidized loans is that the government pays the interest on the subsidized loans while you are in school. For unsubsidized loans, interest is charged while you are in school and is added to your loan balance.
Mary and Marty are interested in obtaining a home equity loan. They purchased their house five years ago for $131,000, and it now has a market value of $162,250. Originally, Mary and Marty paid $27,844 down on the house and took out a $103,156 mortgage. The current balance on their mortgage is $90,876. The bank uses 65% of equity in determining the credit limit. What will their credit limit be if the bank bases their credit limit on equity invested and will loan them 65% of the equity?
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interest rate
A home equity line of credit typically has a variable interest rate that is tied to a specified interest rate index that changes periodically (such as every six months). The loan contract specifies how the interest rate will be determined. For example, it may be set equal to the average deposit rates across financial institutions within a particular district plus three percentage points. Because the home serves as collateral for the loan, the lender faces less risk than with an unsecured loan so the interest rate is lower.
Payday Loan
A study by the Consumer Financial Protection Bureau (CFPB) found that more than 80% of payday loans are renewed within two weeks. Furthermore, the majority of payday borrowers renew their loans so many times that they end up owing more in fees than they originally borrowed. In 2017 the CFPB issued new regulations that limit payday lending by requiring lenders to check borrowers' income and liabilities to ensure they can repay a loan, and by preventing indebted borrowers from continually renewing their loans. The regulations are not scheduled to go into effect until 2019, however, and the payday lending industry is already making efforts to weaken them.
no-haggle dealers
Buying a car from these dealers is not only less stressful but far less time-consuming. They set one price for a car, so you do not have to prepare for a negotiating battle Some of these car dealerships still negotiate, however, so before you buy the car, you should make sure the price is no higher than that quoted by other dealers.
negotiating car price over phone
After deciding on the type of car that you want, call a dealer and describe the car and options you desire. Explain that you plan to call other local car dealers, and that you will select the dealer that offers the lowest price. You may also want to emphasize that you will only call each dealer ONCE.
pay day loan interest rates
Although states have usury laws that place a limit on the maximum interest rate that can be charged, the payday loan firms have circumvented that limit by referring to the interest as fees Some states recognize that the fees are really interest payments and prevent payday firms from establishing businesses. However, payday loan firms can be based in the states that allow them and still reach residents in any state via the Internet.
natural disaster such as floods?
Another consideration is whether a car has been in a flood. After disastrous floods such as occur in a hurricane, cars that were flooded are often quickly cleaned up and shipped out of state to be sold where buyers may not think to inquire about flood damage, which can require costly repairs. You can search for a car's VIN at the database maintained by the National Insurance Crime Bureau, which will list any car on which an insurance claim for flood damage was paid (if not insured it would not be on database) In purchasing any car, you should look for signs of water damage or the smell of disinfectant used to combat mold. A mechanic can check for signs that water has entered the various fluids in the car or damaged the electrical system.
example: calculating pay day loan
Assume that you need $400 for some immediate purpose, but will not have any money until you receive your paycheck one week from today. You provide the payday loan firm a check dated one week from today. Be aware that firms such as Cash King, Cash One, CheckMate, and EZLoans, which provide payday loans, charge a high rate of interest on these short-term loans. The payday loan firm may request that your payment be $440, which reflects the loan of $400 and $40 interest and/or fees. You are paying $40 more than the loan you received, which reflects 10% of the loan amount. The cost of financing a payday loan follows: Cost of Financing= 10% × (number of days in a year/number of days in which you have the loan) = 10% × (365/7) = 521% This is not a misprint. It is within the typical range of the cost of financing charged for payday loans.
Common sources of personal loans are
financial institutions, family members, and peer-to-peer lending
annual percentage rate
Because of the Truth-in-Lending Act (1969), lenders are required to disclose a standardized loan rate with directly comparable interest expenses over the life of the loan. This makes it easier for you to compare loans offered by different lenders and select the best loan. The annual percentage rate (APR) measures the finance expenses (including interest and all other expenses) on a loan annually.
Consider how your decisions affect your personal budget
Before buying an expensive new car, consider how your personal cash flow statement would be affected by large monthly car payments When considering the sacrifices you may need to make (cancel spring break, no eating out, downsize apartment to pay a smaller rent, etc.) to buy a new car, you may decide not to, so that you have spending money to enjoy life in other ways.
Repaying Student Loans
Even if you don't graduate from college, you still have to pay back your student loans. Failure to do so will damage your credit history The interest is tax-deductible up to a maximum of $2,500, but the tax benefits are phased out for individuals in high tax brackets If you find yourself in a situation when you cannot repay your loans, you can ask your lender for a deferment or forbearance, which means that your payments are temporarily delayed
personal preference
Determine the car that fits your needs Do you want a small car that is easy to park and gets good gas mileage? Or do you need a minivan to hold your children and their sports equipment? If you are concerned about the environment, you may want to consider an electric car or a hybrid that combines a gas engine with an electric battery. Although electric cars and hybrids generally cost more than a similar gas engine model, you will save on gasoline costs. Federal tax credits may be available, and many states have incentive programs that can lower the cost. You can always screen the cars on your list further by deciding on the size of the engine.
Credit limit on a home equity loan
Financial institutions provide home equity loans of up to 80% (or more in some cases) of the value of the equity in a home. Financial institutions define the market value of your equity as the market value of your home minus the mortgage balance (amount still owed on the home). If you default on a home equity loan, the lender can claim your home, use a portion of the proceeds to pay off the mortgage, and use the remainder to cover your home equity loan If the market price of the home declines, the equity that you invested is reduced. For this reason, lenders do not like to lend the full amount of the equity when extending a home equity loan.
Private Student Loans
For most students, federal loans are preferable to private loans because the interest rate generally is lower, and it is fixed, not variable In addition, federal student loans allow you to enroll in a repayment plan based on your income, an option that is not available with private loans Federal student loans may also be eligible for loan forgiveness programs if you work for 10 years in a public service job such as teaching. The amount of money available through government loans is limited, however, and many students find that they also need to obtain private loans. You can borrow larger amounts of money with private loans than with federal loans, but private loans are also generally more expensive. Private loans usually charge a higher interest rate than federal loans, and interest is charged while you are in school just as it is for federal unsubsidized loans often have a variable interest rate, so your monthly payment could increase over time if market interest rates rise private loans are not eligible for loan forgiveness and other beneficial loan repayment programs Most lenders require that undergraduates have a cosigner for the loan.
Trade in Tactics
If you are trading a car in, some dealers will pay a relatively high price for your trade-in, but charge a high price for the new car. For example, they may pay you $500 more than your used car is worth, but then charge you at least $500 more than they would have charged for the new car if you did not have a car to trade in. Attempt to negotiate the price on the new car first, before even mentioning that you have a car to trade in. If you purchase a car from a typical dealer, many of the salespeople will congratulate you as if you had just won the lottery. This is also part of their strategy to make you feel that you got a great deal.
financing rate
If you plan to finance your car purchase through the car dealer, you should compare financing rates among dealers. One dealer may charge a lower price for the car but charge higher financing costs for the loan. Other dealers may offer an unusually low financing rate, but charge a higher price on the car. When financing through a car dealer, beware of a dealer markup, in which the dealer arranges the loan and then marks up the lender's interest rate without disclosing the markup to the customer. For example, a dealer may obtain financing for your car at 10%, but charge you 12%. If you obtain financing from a financial institution rather than the dealer, you can easily compare financing rates of various financial institutions on the Internet.
income-based repayment (IBR)
If your federal loan repayments are very high relative to your income, you can apply for Income-Based Repayment or IBR (also known as Income-Driven Repayment or IDR). This program offers four plans that call for repayment periods of 20 to 25 years. Your monthly payment is set at an amount intended to be affordable based on your income and family size If your income and/or family size change, your payment is readjusted. At the end of the repayment period, any remaining loan balance is forgiven
Example: You obtain a loan of $2,000 that is based on the simple interest method with an annual interest rate of 12% (1% per month) and twelve equal monthly payments. Given this information, a computer generates the loan repayment schedule in Exhibit 9.3. Notice at the top of the exhibit that each monthly payment is $177.70. Each payment consists of an interest payment and a portion that goes to repay the loan principal. At the end of the first month, the interest owed on $2,000 based on a monthly interest rate of 1% is:
Interest Owed=Outstanding Loan Balance×Interest Rate= $2,000×.01 =$20
Family Members or Friends
Loan agreement should be in writing and signed by all parties If they trust that you will repay the loan on time and in full, they may be willing to provide you with a loan that earns the same interest rate as their savings account.
Peer-to-peer lending (P2P)
Online platforms, such as, Lending Club and Prosper, which together facilitate lending amounting to more than $1 billion per year lending, the funds are provided by individual investors, not by financial institutions. Individuals may borrow amounts ranging from $1,000 to $35,000 or $40,000 at interest rates that may be lower than the interest charged by a financial institution. Although the borrower must pay a loan origination fee, it may also be less than a financial institution would charge. Loans are issued for three- or five-year terms and require monthly payments. The average FICO score for P2P borrowers is around 700. The majority of P2P borrowers use their loans to pay off existing loans from other lenders or to pay off credit card debt!!!!
Example: add-on interest
Reconsider the example in which you receive a loan of $2,000 to be repaid over one year, but assume that you are charged 12% interest based on the add-on method. You would first determine the amount of interest that is owed by applying the annual interest rate to the loan amount: Interest Owed= $2,000× .12 = $240 Next, determine the total payment owed by adding the interest to the loan amount: Total Payment=$2,000+$240 =$2,240 Finally, divide the total payment by the number of monthly payments: Monthly Payment=$2,240/12 =$186.67 Notice that your monthly payment with the add-on method is about $9 per month more than your payment with the simple interest method. Even though the same interest rate is used for both methods, the add-on method is more costly. The reason is that the interest payment is not reduced over time as you pay off the loan.
FREE APPS for Personal Finance: Estimating Your Monthly Car Loan Payment
RoadLoans.com
Lucas wants to buy a used car that will cost $5,800. How much will his monthly payment be if he puts $2,900 down and finances the remainder at 6% for two years?
Since Jennifer is putting $2900 down she will only be financing $2,900. The calculator inputs are $2,900 PV; .5 I/Y; 24 N; 0 FV; CPT PMT = - $128.52. Note that the solution generates a negative number since these payments will be cash outflows.
the value of information
Some car dealers attempt to make a higher profit from customers who are not well informed about the price that they should pay for a car. Shop around and make sure that you know the typical sales price for the car you want. You can obtain this information from Consumer Reports and various Websites that will provide you with a quote based on the car model and features you want. You can do all your shopping from your computer or your smartphone. For example, you may be able to obtain the dealer invoice price, which is the price that the dealer pays the manufacturer for the car. The difference between the price quoted by the dealer and the invoice price is the dealer markup!!! Be aware that manufacturers commonly provide dealers a rebate (like a sale, referred to as a hold back), but dealers do not normally provide this information to their customers. A dealer could possibly charge a price that is only $200 above its dealer invoice, but if it received an $800 rebate from the manufacturer, the price is really marked up $1,000!!!!!!!
Revised Car Loan Contracts
Some car dealers will allow a car buyer to write a check for the down payment, fill out a car loan application, and drive the car home. If the application is not approved, the car buyer may have to reapply for a car loan that is set at a higher rate. At this point, the buyer may not have much choice except to accept the less-favorable terms set by the lender.
resale value
Some cars have a much higher resale value than others For example, you can expect that an Acura will have a higher resale value than a Hyundai. Although you cannot perfectly predict the future resale value of a car, you can look at today's resale value of similar cars that were sold years ago. Numerous sites on the Internet, such as www.edmunds.com, provide the market values of used cars, which you can use to determine the resale value as a proportion of the original sales price.
Adding Credit card debt to car loan debt
Some consumers might consider purchasing a new car with a car loan and avoid restricting their other spending by using credit cards and making only the minimum required payments on the cards each month. They will not only have the burden of the large car payment every month for the next four years, but also will have to make large payments to cover credit card debt in the future. Many consumers who could not stay within a reasonable budget in their younger years have difficulty adjusting in future years when they need to start paying off debt. Thus, their lack of discipline might lead them to a long-term trend of excessive spending that could ultimately end in their credit being cut off by their creditors. If they had been willing to sacrifice in their younger years by staying within their budget and buying a cheap used car, they might have avoided the accumulation of debt over time.
Selling car to make up for car loan
Some consumers who spend excessively on a car might believe that if they find they cannot afford to make the monthly car payments, they can easily correct the situation by selling their car. However, this solution is limited New cars lose at least 10% and sometimes as much as 20% of their value as soon as they are driven off the lot!!!! Consider the new car that Evan could have purchased for $22,000 with borrowed money in the example presented earlier. If Evan purchased the car and tried to sell it a month later, he might receive about $18,000, or $4,000 less than what he owed on the car. In other words, the use of the new car for one month cost him $4,000. The point here is that consumers should not rush into purchasing a new car until they have carefully considered whether they can really afford it!!
Home equity loans
Some personal loans are backed by the equity in a borrower's home, and these loans are commonly referred to as home equity loans. The proceeds of the loan can be used for any purpose.
example: max credit on home
Suppose that you own a home worth $100,000 that you purchased four years ago. You initially made a down payment of $20,000 and took out an $80,000 mortgage. Over the last four years, your mortgage payments have added $10,000 in equity. Thus, you have invested $30,000 in the home, including your $20,000 down payment. Assume that the home's market value has not changed. Also, assume that a creditor is willing to provide you with a home equity loan of 70% based on the market value of equity in the home. In this example, the market value of equity is equal to the amount of equity you invested in the home. Maximum Amount of Credit Provided= Market Value of Equity in Home× .70 $30,000×.70 =$21,000
You can use auto loan Web sites to estimate the maximum amount you can borrow, based on the financial information you provide.
The AutoTrader app (by Autotrader.com, Inc) allows you to search for new and used cars that are for sale near you. A listing of used cars for sale near your location includes the price, mileage, a photo, and seller contact information.
Lease vs. Buying Car
The decision to purchase versus lease a car is highly dependent on the estimated market value of the car at the end of the lease period. If the expected value of the car in the previous example were $6,000 instead of $10,000 after four years, the total cost of purchasing the car would have been $4,000 more. With an expected market value of $6,000, the total cost of purchasing the car would have been higher than the total cost of leasing, so leasing would have been preferable.
How Personal Loans Fit Within Your Financial Plan
The following are the key personal loan decisions that should be included within your financial plan: 1) How much money can you afford to borrow on a personal loan? 2) If you obtain a personal loan, should you pay it off early? YES
simple interest
The size of the monthly payment is dependent on the size of the loan, the interest rate, and the maturity. The larger the loan amount, the larger the monthly payment. The higher the interest rate, the larger the monthly payment
home equity fees
These fees may include an appraisal fee so that the lender can determine the value of the home, an application fee that may not be refunded even if your loan request is turned down, up-front charges that may amount to 2% or 3% or more of the credit limit, and closing costs including fees for attorneys and a title search. In addition, some HELOC plans charge annual maintenance fees or transaction fees whenever you draw on the line of credit.
application process
When applying for a loan, you need to provide information from your personal balance sheet and personal cash flow statement to document your ability to repay the loan.
condition
When buying a used car, be sure to assess the condition of the car beginning with the exterior. Has some of the paint worn off? Is there rust? Are the tires in good shape? Are the tires worn on one side (which may indicate that a wheel alignment is needed)? - check the interior. Are the seats worn? Do the electric devices work? Now look under the hood. Is there any sign of leaks? If you are still seriously considering the vehicle, ask to see the repair and maintenance records. Has the car been properly maintained and serviced over time? Has the oil been changed periodically? Most used car dealers subscribe to a vehicle history service such as CARFAX or Autocheck that will indicate whether a car has been in a major accident and been repaired. Ask the dealer to see the car's history. You can also obtain the car's history yourself, but you will have to pay a fee. The cost of having a mechanic evaluate the car is worthwhile because it may enable you to avoid buying a car that will ultimately result in large repair expenses!!!
negotiating price
When shopping for a car, you have a choice between dealers that negotiate and dealers that offer one set price for a specific car to all customers. Any dealer that negotiates will purposely price its cars well above the price for which it is willing to sell the car. For example, the dealer may initially quote a price that represents the manufacturer's suggested retail price (MSRP). This price is also referred to as the sticker price. The strategy of some dealers is to make you think that you are getting a great deal as a result of the negotiations. If any customer is naïve enough to pay the full price, the car dealer earns a much larger profit at the customer's expense. The salespeople are trained to act as if they are almost giving the car away to the customer by reducing the price by 5% to 20%
Price
While you have already determined the amount that you are willing to spend, you should compare the prices of the cars that fit your preferences and are within your price range There will likely be more than one car within your price range that could satisfy your needs and preferences, and one of these cars might have a lower price because the dealer has a larger inventory of that car and is more willing to sell it at a lower price.
How much money to spend on a car
Your decision about much money you should spend on a car is critical because it can affect your budget as well as your lifestyle. When making this decision, carefully consider how your choices could affect your spending on other needs, and your lifestyle in general. If all your friends have borrowed excessively to buy expensive cars, you may convince yourself that this is normal, without realizing how it might constrain other forms of spending.
two ways to borrow against your home's equity
With a simple home equity loan, you receive the money you are borrowing in a lump sum. The loan usually will have a fixed interest rate With a home equity line of credit (HELOC), the lender provides you with a line of credit that you can draw against over a period, such as ten years. That is, the HELOC allows you to borrow various amounts up to a specific credit limit. Some plans require you to borrow a minimum amount such as $300 each time you draw on the line of credit or to keep a certain balance outstanding. You may also be required to make an initial withdrawal when the HELOC is set up. HELOCs typically have variable interest rates, but you pay interest only on the amount of funds that you borrow. You can typically pay the interest owed per month on the amount you borrow and then pay the principal at a specified maturity date. You may also be allowed to pay off the principal before the HELOC's term ends and still have access to the funds if you need them in the future.
purchasing a car online
You can buy a car online directly from some car manufacturers or from car referral services such as Autobytel Inc. Car referral services forward your price quotation request to specific dealerships, which then respond by sending you a quote. CarsDirect at www.carsdirect.com provides you with quotes based on deals it has made with various dealerships That is, it receives guarantees from some dealerships on the prices for various types of cars. When a customer requests a quote, the car-buying service provides quotations that include a markup for its service. In other words, it is serving as the middleman between you and the dealership. If a customer agrees to the price, the car-buying service instructs one of its dealerships to deliver the car. It is not as easy to detect the differences on a Web site. Unlike a Web site, a dealership can anticipate your questions and arrange for a test drive. It is also more difficult to force an online service to meet its delivery promise to you. For example, an online car seller may guarantee you a price for a specific car, but not necessarily meet the delivery date You have limited ability to enforce the deal because you may only be able to reach them by e-mail or voice mail. You can place more pressure on a local dealership to meet its promise by showing up at the dealership and expressing your concerns. You can also buy used cars online through eBay and other Web sites. Given the limitations of buying a car online, many customers still prefer to buy a car at a dealership.
Avoiding Scams
You should avoid any lender that guarantees you a loan before reviewing your application or advertises with messages such as "We don't care about your past" or "Bad credit history? No problem!" - A legitimate lender will not promise you a loan until it reviews your application. Alternatively, the fraudster may ask you to pay an upfront fee, which may be called an application fee or document fee or some other name. Legitimate lenders may charge an origination fee, but you are not asked to pay the fee until your application is processed and you are approved for a loan. To avoid scams, check a lender's reputation with the Better Business Bureau or your state attorney general's office or consumer protection agency
loan contract
a contract that specifies the terms of a loan, as agreed to by the borrower and the lender loan contract identifies the amount of the loan, interest rate, repayment schedule, maturity, and collateral!!!!!
student loans
a loan to finance a portion of a student's expenses while pursuing an undergraduate or graduate degree. About 70% of students graduate with at least some student loan debt. The median amount of debt for students with a bachelor's degree is about $25,000. Loans are often provided as part of a financial aid package that includes scholarships, grants, loans, and work-study programs. The Consumer Financial Protection Bureau has a comparison tool that can help you compare multiple financial aid offers.
add-on interest method
a method of determining the monthly payment on a loan; involves calculating interest that must be paid on the loan amount, adding together the interest and loan principal, and dividing by the number of payments
Cosigning
agreeing to take responsibility for loan payments if the other person fails to make them The cosigner is responsible for any unpaid balance if the borrower does not repay the loan. If the borrower defaults and the cosigner does not repay the loan, the lender has the right to sue the cosigner or to try to seize that person's assets, just as if the cosigner were the borrower In addition, cosigning on a loan can restrict the amount that the cosigner is able to borrow. Therefore, you should only be willing to cosign a loan if you trust the borrower and will not need to borrow funds for yourself in the near future.
home equity loans
allows homeowners to borrow against the equity in their home. The home serves as collateral to back the loan. The borrowed funds can be used for any purpose, including a vacation, tuition payments, health care expenses, or debt consolidation.
Personal Loan Process
application process, loan contract, loan repayment schedule, maturity, collateral, and cosigning
amount of loan
based on how much the lender believes you can pay back in the future. You should borrow only the amount of funds that you will need because you will be charged interest on the entire amount that you borrow.
Student Loans and Bankruptcy
be aware that unlike other types of debt, student loans are not dischargeable in bankruptcy except in very rare circumstances. Thus, unless you fit into one of the few exceptions, you will have to repay all the money that you borrow with interest. Note that if you default on your student loans without obtaining a deferment or forbearance, the entire loan amount becomes due. Your school's financial aid office can be a good source of information. Several U.S. government Web sites can also be helpful: www.ed.gov and studentloans.gov (both from the Department of Education) and www.consumerfinance.gov (the Consumer Financial Protection Bureau).
Check for recalls before purchasing a car
check for any unrepaired recalls such as defective airbags (dangerous if not replaced) You can learn whether a car is subject to a recall by going to www.safercar.gov and entering the car's vehicle identification number (VIN). If there are recall notices, ask the mechanic to determine if the condition has been repaired.
Selecting the car
consider: -personal preference -price -condition -insurance -resale value -repair expenses -financing rate -Revised Car Loan Contracts
equity of a home
determined by subtracting the amount owed on the home from its market value. If a home has a market value of $100,000 and the homeowner has a mortgage loan with a balance of $60,000, the equity value is $40,000.
negotiating car price
if you intend to purchase a new car, consider ordering it if you don't see what you want on the dealer's lot. The cars on the lot may have many features that you don't want. Thus, they will have a higher price. Sometimes, however, dealers want to sell their current inventory to make room for new models, and, in that case, you may be able to negotiate a better price.
personal balance sheet
indicates your assets, liabilities, and net worth at a specific point in time. The assets are relevant because they may serve as possible collateral to back a loan. The liabilities are relevant because they represent your existing debts.
Personal Cash Flow Statement
indicates your cash inflows and cash outflows and therefore suggests how much free cash flow you have on a periodic basis. Lenders use this cash flow information to determine whether you qualify for a loan and, if so, the maximum size of the loan that you warrant. An individual with existing loans or credit card debt may have insufficient cash flows to cover the payments on any additional loans. key component of the personal cash flow statement of most prospective borrowers is their income. Lenders require income documentation, such as a Form W-2, which is a form from your employer that indicates your annual earnings, or pay stubs, which indicate your recent salary.
simple interest
interest computed as a percentage of the existing loan amount (or principal). It is measured using the principal, the interest rate applied to the principal, and the loan's time to maturity (in years). If you input the loan amount, the interest rate, and the loan maturity, the loan repayment schedule will provide you with the following information: -The monthly payment -The amount of each monthly payment applied to pay interest -The amount of each monthly payment applied to pay down the loan principal -The outstanding loan balance that remains after each monthly payment
Payday Loan (also called a cash advance loan)
is a short-term loan provided to you if you need funds in advance of receiving your paycheck To obtain a payday loan, you write a check to the lender for the amount of the loan plus the interest. You date the check for the date in the future when you will receive your paycheck. The payday loan firm will hold the check until that time and will cash it then because your checking account will have sufficient funds After you provide this check to the payday loan firm, it provides you with your loan in cash or by transmitting funds into your checking account. You can also obtain a payday loan online. Instead of providing the lender with a postdated check, you give the lender permission to electronically withdraw money from your bank account.
a personal loan
is normally used to finance one large purchase and has a specific repayment schedule can pay off the personal loan on an installment basis, for example, by making a payment each month for the next forty-eight months.
Purchase versus Lease Decision (Cars)
leasing: An advantage of leasing is that you do not need a substantial down payment. In addition, you return the car to the car dealer at the end of the lease period, so you do not need to worry about finding a buyer for the car. Furthermore, you will always be driving a relatively new car. disadvantages: Because you do not own the car, you have no equity investment in it, even though the car still has value. You are also responsible for maintenance costs while you are leasing it. Keep in mind that you will be charged for any damage to the car over the lease period. Note, too, that if you always lease another car when the lease period ends, you will be making lease payments indefinitely and will never actually own a car leasing a car is almost always more expensive than purchasing a car Some car dealers impose additional charges beyond the monthly lease payments. You will be charged if you drive more than the maximum number of miles specified in the lease agreement. You may be assessed a fee if you end the lease before the period specified in the contract. You may also have to purchase more car insurance than you already have. Some of these charges may be hidden within the lease agreement. Thousands of customers have filed legal claims, alleging that they were not informed of all possible charges when they leased a car. If you ever seriously consider leasing, make sure that you read and understand the entire lease agreement. The Honcker app allows you to compare possible leasing options when you plan to lease a car. This app can serve as a useful guide in your decision.
forbearance
may be granted for a medical issue or temporary financial difficulties Private lenders may not offer deferment and forbearance options, although some do. During both deferment and forbearance, interest will continue to be charged on private loans and unsubsidized federal loans. It will be added to your principal, so a long period of deferment or forbearance could substantially increase the amount that you will ultimately have to repay.
deferment
often granted for situations such as active duty in the military service, re-enrollment in school, or unemployment
No debt solution
only buy what you can pay cash for This strategy forces them to purchase an inexpensive used car when they are younger because that is all that they can afford. In addition to avoiding debt, this approach might allow them to save much more of their income over time because they can save some or all the money each month that they would have needed to make debt payments. decision to stay within a limited budget at an early age may be easier to accept when they realize that it will allow them to spend more money in the future.
collateral
represents assets of the borrower (if any) that back the loan if the borrower defaults A loan that is backed or secured by collateral is referred to as a SECURED loan a loan that is NOT backed by collateral is an UNSECURED loan In general, you will receive more favorable terms (such as a lower interest rate) on a secured loan because the lender has less to lose in the event that the loan is not repaid. When a loan is used to purchase a specific asset, that asset is commonly used as collateral. For example, if your purchase of a boat is partly financed, the boat will serve as collateral
The Federal Trade Commission's Used Car Rule
requires dealers to post a buyer's guide in every used car offered for sale (a few states require their own similar guide). The guide must tell you whether the car is being sold "as is" or with a warranty and what percentage of the repair costs the dealer will pay under the warranty if there is one. If the Buyers Guide indicates that there is a warranty, the dealer must give you a written warranty indicating what the warranty covers. Sometimes the guide will indicate that the car is being sold "as is," but the dealer will give you an oral promise to repair the vehicle or cancel the sale if you're not satisfied with the car. Do not rely on an oral promise; insist that the dealer's promises be written on the Buyers Guide!!!
Financing Decision
should estimate the dollar amount of the monthly payment By evaluating your typical monthly cash inflows and outflows, you can determine whether you can afford to make the required payments to finance the car You should conduct the estimate before shopping for a car so that you know how much you can afford. The more money needed to cover the car payments, the less you can add to your savings or other investments.
insurance
significantly higher insurance costs because they are more difficult to repair after accidents, are higher priced, or are common theft targets. Obtain insurance estimates on any car before making the purchase. Be aware that to obtain a loan to purchase a car, you will have to have insurance to cover the car. If you let your insurance lapse, the lender has the right to obtain insurance on the car and charge you for it. This is called force-placed insurance, and it is usually much more expensive than insurance that you obtain yourself. ??????
maturity
the life or duration of the loan the longer the maturity, the smaller the monthly payments BUT you will be paying interest rate for longer and occur more debt try to pay it off early but make sure there is no prepayment penalty. Lenders sometimes impose a penalty if a loan is paid off early because they are receiving less interest. When you obtain a loan, you should always ask if there is a prepayment penalty. If there is, you may want to try to negotiate to have it removed or look for other lenders.
Interest rates on personal loans
three most common types of interest rates financial institutions use to measure the interest due on personal loans are the annual percentage rate, simple interest, and add-on interest.