Loans & Debt Flashcards
Why use credit?
- Purchase a car
- Buy a house
- Get an education
- Emergencies
What is credit?
Credit is the trust which allows the bank to provide money (or resources) to you, where you don’t have to reimburse the bank immediately, but you promise to either to repay or return those resources at a later date, with extra interest.
Interest
Interest is the amount of money that you pay to the lender for using their money. It is usually expressed as a percentage of the amount you borrow, and it is charged over a period of time, such as a month, a year, or the entire term of the loan.
Interest rates
Not all loans and credit have the same interest rate. Some places charge more or less interest than others, depending on many things, like your credit score, your income, your property, and the kind and reason of the loan.
For example, a mortgage may have a lower interest rate than a credit card, because a mortgage is backed by the house, therefore it is less risky for the bank.
The interest rate is the percentage of the amount you borrow that you have to pay as interest. The higher the interest rate, the more expensive the credit is.
Places that lend money
- The bank
- Merchants
- Peer-to-peer
- Payday loans
- Title loans
What to consider when choosing where to borrow money
- Know what you need and want: Why do you need to borrow money? How much do you need? How long do you need it for? How will you use it? How will you pay it back? These are some of the questions you should ask yourself before you get a loan or credit. This will help you choose the most fitting and cheap place for your reason.
- Know how much you have and can afford: How much money do you make? How much money do you spend? How much money do you save? How much money do you owe? These are some of the questions you should ask yourself before you take a loan or credit. This will help you know how much you can borrow and repay, without hurting your money health and happiness. You should always borrow what you can afford and avoid getting more debt than you can handle.
- Know your choices and other ways: What are the different places that lend money to you? What are their good and bad things? How do they compare in terms of interest rates, fees, payment plans, ease, and help? These are some of the questions you should ask yourself before you choose a loan or credit. This will help you see the benefits and drawbacks of each place, and find the best deal and value for your money. You should also think about other ways to pay for your needs and wants, like saving, earning, or selling, before you borrow.
Predatory lending
When people are in dire need for money, they may be tempted to take out a loan from a lender who doesn’t have their best interests in mind. This is called predatory lending. The lender might make it seem like they are helping someone out in a tough situation, but really they are taking advantage of them.
People may use predatory lending for a variety of reasons. Maybe they lost their job and need money to pay their rent, or they need to fix their car so they can keep getting to work. Sometimes people need money to pay for an emergency medical bill. Whatever the reason, these people are vulnerable, and predatory lenders know it.
Example of predatory lending:
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Dangers of predatory lending
One of the biggest dangers of predatory lending is that it usually comes with very high interest rates. This means that even if someone is able to pay back the original amount they borrowed, they’ll also have to pay a lot more on top of that. In some cases, the interest rates are so high that the person might never be able to pay it all back.
It’s important to note that predatory lending rates can vary widely, and that even if a rate doesn’t seem astronomically high, there may be other aspects of the loan (such as hidden fees or aggressive collection practices) that make it predatory in nature.
APR
Annual Percentage Rate.
Basically, the yearly interest rate.
Payday lenders
Payday lenders often charge exorbitant interest rates, with the annual percentage rate (APR) averaging around 400%
(and sometimes reaching as high as 100%).
Car title lenders
Similar to payday lenders, car title lenders often charge extremely high rates of interest. The average APR for a car title loan is 300%.
Subprime mortgage lenders
Subprime mortgages are generally offered to borrowers with poor credit histories, and they often come with high interest rates to compensate for the increased risk to the lender. For example, prior to the financial crisis in 2008, subprime mortgage rates often ranged from 8% to 12%
(when “prime” mortgage rates were around 6%).
How to recognize predatory lending
- Predatory lenders often charge extremely high interest rates that make it difficult or impossible for borrowers to repay their loans.
- Another common tactic of predatory lenders is to include hidden fees and charges in the loan agreement, which the borrower may not realize until it’s too late.
- Predatory lenders often target people with low incomes, bad credit, or those who are otherwise in difficult financial situations. They may also target specific communities, such as people of color or immigrants.
- Predatory lenders may use aggressive marketing tactics to lure people into borrowing money. This can include high-pressure sales pitches, excessive phone calls, or misleading advertisements.
- Some predatory lenders may encourage borrowers to repeatedly take out new loans in order to pay off existing ones. This can trap people in a cycle of debt that is difficult to escape.
- Predatory lenders may not take into account whether or not the borrower will actually be able to repay the loan. They typically do not ask to check a credit score.
Revolving credit
Revolving credit is when you have a limit of how much you can borrow, but you can use it repeatedly as long as you pay back some of it every month. For example, a credit card is a type of revolving credit. You can use your credit card to buy things online, in stores, or pay bills. Every month, you get a statement that shows how much you spent, how much you owe, and how much you need to pay at least. This is called the minimum payment.
You can pay more than the minimum, or even the full balance, if you want to. If you don’t pay the full balance, you will be charged interest on the remaining amount. Interest is a fee that the lender charges you for using their money. The interest rate is a percentage that tells you how much interest you pay per year. The higher the interest rate, the more you pay.
Installment credit
Installment credit is when you borrow a fixed amount of money and agree to pay it back in equal monthly payments over a set period of time. For example, a personal loan is a type of installment credit. You can use a personal loan to pay for a big expense, like a car, a vacation, or a home improvement.
You will get a contract that tells you how much you borrowed, how much you need to pay every month, how long you have to pay it back, and what interest rate you will pay. The interest rate is usually fixed, which means it won’t change during the loan term. The monthly payment is usually the same every month, unless you pay extra or miss a payment.
