Chapter 7:
Planned Borrowing
Objectives
• Discuss the elements of the planned use
of credit.
• Establish your own debt limit.
• Understand the language of consumer
loans.
• Describe the sources of consumer loans.
Objectives
• Calculate the APR and finance charges on
both single-payment and installment loans.
• Recognize signs of over-indebtedness,
know what to do when it occurs, and
explain your rights regarding credit
collection and bankruptcy.
Planned Borrowing
DID YOU KNOW!
Most people use installment credit 12+ times
during their life.
Yet, only 1:3 shop for credit terms!
Planned Borrowing
A knowing decision to borrow to finance a
purchase or simply to borrow cash.
Planning Your Credit Usage
THE TASK OF DETERMINING:
• When
• How often
• How much
Establishing a Debt Limit
The debt limit most people establish for
themselves is lower than what lenders would
be willing to lend.
Establishing a Debt Limit
• Debt-payments-to-disposable-income
method
• Ratio of debt-to-equity method
• Continuous-debt method
Credit Capacity Indicators
Debt Payments-to-Income Ratio
monthly payments*
monthly after tax income
*Not including housing
6-9
Credit Capacity Indicators
Debt To Equity Ratio
total liabilities
=
Should be < 1
net worth*
*Excluding home value
6-10
Debt-Payment Limits as a Percentage of
Disposable Income
Percent
10 or less
For Current
Debt*
Take on
Additional Debt?
Safe limit; borrower feels little
debt pressure.
Could be undertaken
cautiously.
11 to 15
Possibly safe limit; borrower
feels some pressure.
Should not be undertaken.
16 to 20
Fully extended; borrower
hopes that no emergency
arises.
Only the fearless or foolhardy
ask for more.
21 to 25
Overextended; borrower
worries about debt
No, borrower should see a
credit counselor.
* Excluding home mortgage loans and convenience credit to be repaid in full when the bill arrives.
Setting Debt Limits for Dual-Earner Households
BEWARE!
If one of the earners reduces/eliminates
earnings, debts that had been manageable with
two incomes may become overwhelming.
The Language of Consumer Loans
• Installment loans
• Secured/unsecured loans
• Purchase loan installment contracts
Monthly Installment Payments (Principal and
Interest)
Monthly Installment Payment (Principal and Interest)
Required to Repay $1,000*
Terms of Installment
4%
6%
8%
10%
12%
14%
16%
18%
20%
1 year (12 months)
85.15
86.07
86.99
87.92
88.85
89.79
90.73
91.68
92.63
2 years (24 months)
43.42
44.32
45.23
46.14
47.07
48.01
48.96
49.92
50.90
3 years (36 months)
29.52
30.42
31.34
32.27
33.21
34.18
35.16
36.15
37.16
4 years (48 months)
22.58
23.49
24.41
25.36
26.33
27.33
28.34
29.37
30.43
5 years (60 months)
18.42
19.33
20.28
21.25
22.24
23.27
24.32
25.39
26.49
*To illustrate, assume you want to know how much the monthly payment would be to finance a $9,000
loan at 10% for 3 years. To repay $1,000, the figure is $32.27, multiply by 9 (for $9,000) to determine that
$290.43 is required for 36 months of payments. When using amounts greater or less than $1,000, convert
using decimals. For example, a loan of $950 at 10 percent for 3 years would be calculated as follows:
$32.27 x 0.95 = $30.66.
Sources of Consumer Credit
Parents and family
members
Savings and loan
association
Commercial bank
Finance company
Credit union
Retailers
Life insurance
company
Cash advances
Truth In Lending Rights
The Truth In Lending Act
requires creditors to provide
you with accurate and
complete credit costs and
terms. APR
Creditors must disclose
credit terms and information...
 In a clear and conspicuous manner
 In a form you can keep
Calculating Finance Charges and APR
APR CALCULATIONS FOR SINGLEPAYMENT LOANS:
•Simple-interest method
•Discount method
Dealing With Over-indebtedness
TEN SIGNS OF OVER-INDEBTNESS:
1.
Exceeding debt/credit limit.
2.
Running out of money.
3.
Paying only the minimum due.
4.
Requesting new cards and increases in credit limits.
5.
Paying late or skipping payments.
6.
Not knowing how much you owe.
7.
Taking add-on loans.
8.
Using debt consolidation.
9.
Receiving notice of repossession or foreclosure.
10. Experiencing garnishment.
Dealing With Over-indebtedness
• Federal law regulates debt collection
• Bankruptcy as last resort
• Chapter 13 (reorganization)
• Chapter 7 (liquidation)
History of Bankruptcies Since 1980
Fair Debt Collection Practices Act
Collection agencies...
Can’t be abusive or threaten
Can’t call you at work if you say no
Can’t tell boss and friends
Can’t call you at odd hours
Must follow set procedures
The act does not apply to creditors that
try and collect the debt themselves
Impact of
Divorce on Credit
• Pay attention to accounts held jointly
• Ask creditors to close joint accounts
• Remember, creditors can legally collect
from either party
• Get updated copy of credit report
Alternative Lenders
• Pawnshop
• Rent-to-own program
• Check cashers
• Rapid refund services
Manage
Over-indebtedness
1. Determine what is owed.
2. Focus budget on debt reduction.
3. Contact creditors.
4. Take on no new credit.
5. Refinance.
6. Find good help.
7. Avoid bad help.
Manage Student
Loan Debt
1. Choose most advantageous repayment
pattern allowed.
2. Consolidate student loans.
3. Pay electronically.
4. Be punctual with repayments.
5. Refinance with second mortgage loan.