Module 9 Credit and debt managment Flashcards
Debt Capacity
The amount of debt that an individual can reasonably expect to be able to repay under the term of the loan agreement given current and expected cash flow
Liquidity
Ability of the family to meet debt service payment in the short term
Solvency
Long term ability of a family to pay its debts
Asset vs Cash flow (credit and debt managment)
The most important factors that affect debt capacity are net worth and expected net cash flow
Debt Service Ratio
Portion of the income that will be applied to service debt
Consumer Credit
Money borrowed to purchase consumer goods and services. Obtained through financial institutions through a scoring system + credit history from a credit bureau
Criminal Rate of interest
An EAR that exceeds 60% on the credit advenced
7 common types of credit and loans
1) Credit Cards
2) Unsecured personal credit line
3) Home equity credit line
4) Overdraft Protection
5) Secured line of credit
6) Payday Loan
7) Pawnbrockers
What are the 4 major features of a credit card
- Annual Fee
- Grace Period
- Interest rate
- Additional Features
Line of credit
Max amount of $ that you can owe at any point in time
Home equity credit line
Equity on home is used as a colateral to secure a line of credit
Overdraft Protection
Unsecured line of credit set up to cover overdraft on checking account
Investment loan
Loan taken to acquire investment asset. Generaly it increases net worth of the family. The interest on an incestment loan are tax deductible. Also financial leverage
3 Reasons to use financial leverage
- Increase net worth of the family
- Magnify the after tax investment return
- Creat tax shelter for high income earners
