Personal finance 6th madura chapter 09 personal loans
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Personal Finance
SIXTH EDITION
Chapter 9
Personal Loans
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Chapter Objective (1 of 2)
9.1 Provide a background on personal loans
9.2 Outline the types of interest rates that are charged on personal loans
9.3 Discuss car loans
9.4 Explain how to decide between financing the purchase of a car and leasing a car
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Chapter Objective (2 of 2)
9.5 Describe the key features of student loans
9.6 Describe home equity loans
9.7 Describe payday loans
9.8 Describe how personal loans fit within your financial plan
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Background on Personal Loans (1 of 7)
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Usually obtained to finance a large purchase
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Sources of personal loans
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Financial institutions
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Commercial banks, savings institutions, credit unions and finance companies
Family members or friends
Loan agreement should be in writing and signed by all parties
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Background on Personal Loans (2 of 7)
•
Peer-to-Peer Lending
–
–
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Also known as P2P
Conducted through online platforms
The 2 most popular at this time are
–
–
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Lending Club
Prosper
More than $1 billion per year now provided by individual investors via P2P
Amounts are typically from $1k to $35k
Credit report and FICO score are used
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Background on Personal Loans (3 of 7)
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Determining whether a loan is sensible
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Periodic payments will be required over time
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You are sacrificing future earnings
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Avoid a loan if your source of income to repay it is questionable
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Background on Personal Loans (4 of 7)
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The personal loan process
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Application process
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Personal balance sheet
Personal cash flow statement
Loan contract: a contract that specifies the terms of a loan, as agreed to by the borrower and
the lender
Amount of the loan
Interest rate
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Background on Personal Loans (5 of 7)
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Loan repayment schedule
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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
Maturity: the life or duration of the loan
Longer maturity equals lower payments, but more interest is paid over the life of the loan
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Background on Personal Loans (6 of 7)
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Collateral: assets of a borrower that back a secured loan in the event that the borrower defaults
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Secured loan: a loan that is backed or secured by collateral
Unsecured loan: a loan that is not backed by collateral
Cosigning is sometimes required if credit history is weak
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Background on Personal Loans (7 of 7)
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Financial Planning Online (1 of 7)
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Go to www.helpwithmybank.gov
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This site provides background information on personal loans.
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Interest Rates on Personal Loans (1 of 5)
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Annual percentage rate (APR): a rate that measures the finance expenses (including
interest and other expenses) on a loan annually
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Standard rate required to be disclosed by lenders
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Provides comparison between lenders
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Result of Truth-in-Lending Act of 1969
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Interest Rates on Personal Loans (2 of 5)
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Simple interest: interest on a loan computed as a percentage of the existing loan
amount (or principal)
•
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Size of payment depends on size of loan, interest rate and maturity
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The higher the interest rate, the higher the payment
Add-on interest: a method of determining the monthly payment on a loan
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Interest Rates on Personal Loans (3 of 5)
EXHIBIT 9.2 Measurement of the Annual Percentage Rate
Other
Total
Annual
Interest
Finance
Finance
Number of
Average Annual
Percentage
Expenses
Expenses
Expenses
Years
Finance Expenses
Rate (APR)*
Bank A
$200
0
$200
1
$200
$200/$2,000 = 10%
Bank B
160
$100
260
1
260
$260/$2,000 = 13%
Bank C
120
200
320
1
320
$320/$2,000 = 16%
*The APR is calculated by dividing the average annual finance expenses by the average annual loan balance.
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Interest Rates on Personal Loans (4 of 5)
EXHIBIT 9.3 Example of Loan Repayment Schedule: One-Year Loan, 12%
Interest Rate (Monthly Payment = $177.70)
Month
Interest Payment
Payment of Principal
Outstanding Loan Balance
$2,000.00
1
$20.00
$157.70
1,842.30
2
18.42
159.28
1,683.02
3
16.83
160.87
1,522.16
4
15.22
162.48
1,359.68
5
13.60
164.10
1,195.58
6
11.96
165.74
1,029.84
7
10.30
167.40
862.44
8
8.63
169.07
693.37
9
6.94
170.76
522.61
10
5.23
172.47
350.13
11
3.50
174.20
175.94
12
1.76
175.94
0
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Interest Rates on Personal Loans (5 of 5)
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You can use the phone app “Debts Break” to estimate the time it will take you to pay off
your debt using information you provide
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Search for “Debts Break” app (by LINKSLINKS LTD) on your mobile device
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Car Loans (1 of 6)
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How much money to spend on a car?
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Consider how your decision affects your personal budget
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Adding credit card debt to car loan debt
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The no-debt solution
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Only buy what you can pay cash for
The limited-debt solution
Short term loan
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Car Loans (2 of 6)
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Selecting the car—things to consider
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Personal preferences
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Price
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Condition
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Insurance
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Resale value (www.edmunds.com)
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Repair expenses
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Financing rate
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Revised car loan contracts
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Financial Planning Online (2 of 7)
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Go to the autos section of Yahoo.com
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This Web site provides estimates of what you should pay for any new car or used car
based on the car’s features and options that you specify
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Financial Planning Online (3 of 7)
•
Go to
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This Web site (Kelley Blue Book) provides trade-in and retail values for a used car,
based on the condition of the car, its age, and other characteristics that you specify.
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Financial Planning Online (4 of 7)
•
Go to and search for “Are Car Ads Taking You for a Ride?”
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This Web site provides questions you should ask when you are offered unusually low
financing rates
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Car Loans (3 of 6)
EXHIBIT 9.4 Stephanie Spratt’s Car Analysis
Expected Resale
Value After Two Years
(as a proportion of
Repair Expenses
Car
original sales price)
and Service Maintenance
Insurance
A
Low
Moderate
High
B
Moderate
Low
Low
C
Moderate
Moderate
High
D
Moderate
High
Moderate
E
Moderate
Low
Moderate
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Car Loans (4 of 6)
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Negotiating the price
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Negotiating by phone may be beneficial
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Trade-in tactics can be misleading
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No-haggle dealers can save time and stress
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Information is valuable–shop around
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Purchasing a car online is possible, but not yet a streamlined process
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Car Loans (5 of 6)
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Financing decisions
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Estimate the dollar amount of the monthly payment before you shop
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Longer financing periods (up to seven years) provide lower payments
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Car may be worthless by the time you pay it off
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Financial Planning Online (5 of 7)
•
Go to the finance section of Yahoo.com and insert the search term “car loan rate”
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This Web site provides average car loan interest rates across the United States and in
various states.
•
These interest rates can help you estimate what your monthly payments would be if
you bought the car
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