Sources of Consumer Credit
Identify different options for
getting credit
Describe the benefits and costs of
credit cards
Types of Consumer Borrowing
Two basic forms of consumer borrowing
– Loans
• Get all money at once/make specified
payments
– Credit Card Accounts
• Purchases added to account balance/pay as
you choose
– Must make minimum payment each month
Secured Loans
A secured loan is backed by something
of value pledged to insure payment
– Pledged Property is called collateral.
Most secured loans are installment
loans
An installment loan is repaid in a certain
number of payments with a certain
interest rate
– May be called Closed-end Credit
Unsecured Loan
An unsecured loan is not backed by any
collateral
– Generally charge higher interest rates than
secured loan
– Most credit cards are unsecured
– Also called open-end credit
Banking Institutions as
Sources of Loans
The most common sources of consumer
loans are banks, savings and loan
associations, and credit unions.
Most lend money for various purposes
Shop around for loans/interest rates
– Some banks have loan sales with lower
rates for new customers
Other Sources of Consumer
Loans
Banks etc should be your first source for
a loan
Other options exist
– Other options more expensive
– Some other options are MUCH more
expensive
Finance Companies
Finance Companies are usually more
willing to lend to people with no or poor
credit rating.
– Loans are riskier
– Higher interest rate charged
Life Insurance Companies
You can use a life insurance policy as
collateral on a loan
– If you don t pay back loan before you die,
the company deducts what you owe before
paying beneficiary
Interest rates are usually lower than
other types of loans
Credit Card Cash Advance
You can borrow money on your credit
card as a cash advance
Interest Rate is very high--17%-24%
– Easy way to get into financial trouble!
Pawnbrokers
Your turn property over to pawnbroker
You must pay back the loan plus fee to
get property back
– If not, pawnbroker can sell property
Rates are very high.
• Watch Pawn Stars
• (History Channel TV Show)
Rent-to-Own Companies
You make weekly rent payments.
After a certain period of time, you own
the item
Technically no interest
You don t own until final payment made
End up paying a lot to own item
$200 vs $10 week/36 weeks ($360)
Credit Cards
When you use a credit card, you are
borrowing money
Must fill out application form to apply for
credit card
Information about your account is stored
on magnetic strip on back of card
Charge Accounts
A regular charge account requires you
to pay your balance in full within a
specified amount of time
A revolving charge account allows you
to carry a balance from one month to
the next
– Pay interest on balance
Sources of Credit Cards
Large Stores
– Kohls, JC Penney, Sears etc
• Can only use at their store
Credit Card Companies
– VISA, MasterCard, Discover, AMEX
Other
– Charitable Organizations, Gasoline
Companies, Universities, Credit Unions
Credit Card Incentives
Many companies offer incentives/
rewards for using their card
– Cash Back
– Frequent Flier Miles
– Free Hotel Rooms
– Gift Certificates
– Charitable Donations
– Etc
Credit Card Incentives
Incentives are designed to encourage
you to sign up and use their card and
run up a balance.
Credit card earns money from the
interest you pay when you carry a
balance
Warning! Don t choose/use a card
exclusively for rewards
Credit Card Costs
Annual Fees- some cards charge an annual
fee/many don t
Interest--rates vary a lot, so shop around
– Can have introductory costs that increase after
trial period. Can be 3%-24%
– You can avoid paying interest by paying balance
in full during grace period/by due date
• Grace Period is the time between billing and due date
– If you don t pay by due date, you will be charged
interest from date of purchase
– Evaluate Costs Before Signing up for a credit card
Credit Card Costs
Limits and Penalties
– Each account has a credit limit
• The maximum amount you can charge on your account
Late Fees
Over Limit Fee
Some banks earn as much/more from fees
than from interest on credit cards
Control Credit Card Costs
Interest is the greatest cost of using a
credit card
Interest rates on credit cards are higher
than almost any other type of consumer
credit
Pay attention!!!! To how you use your
credit cards!!!
Control Credit Card Costs
1. A Loan as an Alternative
– Borrow from a bank to pay credit cards
• Interest is usually less expensive
2. The Minimum Payment Trap
– Largest part of minimum payment is
interest so debt doesn t decrease much
– Pay extra if you want to pay off loan quickly
Control Credit Card Costs
3. Choose the Least Expensive Card
– Best to pay off balance each month
• Don t charge more than you can pay off
– A small decrease in interest rate can
drastically reduce debt over time.
Activity
Check online for a credit card payment
calculator and determine how long it
would take to pay off a $1000 debt if
you only made the minimum payment
each month
– http://www.bankrate.com/calculators/
managing-debt/minimum-payment-
calculator.aspx
