HACE 3200 1nd Edition Lecture 13Outline of Last Lecture I. Revolving BalancesII. Average Daily BalanceIII. Cash AdvanceIV. Credit Evaluation Outline of Current Lecture I. Consumer LoansII. Acceleration ClauseIII. Home Equity Loans- Chapter 7: Using Consumer Loans: The Role of Planned Borrowing- Characteristics of Consumer loanso Single payment(balloon) vs. installment loans( amortized)o Secured vs. Unsecuredo Variable rate( tied to other national rate) vs. fixed rate Who determines the national rate? – Federal Reserve- The Loan Contract: all the conditions of the loano The APRo The number of paymentso Total amount financedo How interest is calculated- The Loan Contract: The Clauseso 1. Insurance agreement clauseo 2. Acceleration clauseo 3. Deficiency payments clauseo 4. Recourse clause- 1) Insurance Agreement Clauseo Requires you to purchase Life Insurance that will payoff your loan after your deatho Normally benefits only the lenderThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Increases your total loan cost- 2) Acceleration Clauseo Requires the Entire Loan to be paid in full if you miss just one paymento Are standard on most loanso Normally not involved if you make a good faith effort to pay- 3) Deficiency Payments Clauseo Requires any amount in excess to be paid if the collateral’s value does not satisfy the loano Also requires payment of any outstanding charges incurred by the lender associated with the disposal of the collateral- 4) Recourse Clauseo Defines the lender’s ability to collect any outstanding balance Repossession of property Wage attachments and garnishments Liens on other property( secondary collateral)- Special Types of Consumer Loanso Home equity loanso Student loanso Automobile loanso Pay day loans Bankruptcy stops some of the clauses.. at the expense if your credit- Home Equity Loanso Are basically second mortgages o Use the equity in your home to secure your loano Normally allow you to borrow up to 80% of your equity - Home Equity Loans (cont’d)o Advantages Interest payments are Tax- deductible  Lower rates of interest than other types of consumer loanso Disadvantages Puts your home at risk if you default Sacrifices future financial flexibility because you can only have one outstanding equity loan- Student Loanso Loans with low, federally subsidized interest rates used for higher educationo Are tax- advantages under the 1997 Taxpayer Relief Act Examples- Federal Direct/ Stafford loans for students. PLUS Direct/ PLUS loans for parents- Dismissal or reduction of student loanso Student loans may be reduced or dismissed under these conditions: Volunteer in Peace Corps Teaching in a school that is low income- How do you calculate your expected student loan payment?o When you know the: Total balance Interest rate Expected # payments- Calculating Monthly Payment of Installment Loanso Repayment of both principal and interest occur at regular intervals(annuity)o Use TVM formula- Automobile Loanso A consumer loan that is secured with an automobileo Has a lower interest rate than an unsecured loano Normally has a maturity length of 2 to 6 yearso How do you calculate auto loan payment?- Cost of Single- Payment Loanso The simple interest calculation method Both principal and interest are due at maturity  Interest= Principal x Interest rate x Time- Interest rate must go in as DECIMAL- Payday Loanso High fees chargeso Short-term loan of 1-2 weekso Those with jobs and checking accounts and students are typical userso Check “held” by the payday lender- Cost of Single Payment Loans (cont’d)o The discount method Subtracts the entire interest charge from the loan principal before you receive the loan but you repay the entire principal- Calculating monthly payment of Installment Loanso The Add-On Method Adds the total interest payment to the principal of the loan- Payment, Interest Rate, and Loan Termo The total interest cost of your loan is directly related to the interest rateo The total interest cost of your loan is directly related to the maturity lengtho Your periodic payment is directly related to both the duration and interest rate- Controlling your use of debto Debt Limit ratio- what percentage of your take home pay or income is taken up by nonmortgage debt paymentso =total monthly non-mortgage debt payments/ total monthly take home