The Borrowing Lesson!

Learn all about borrowing money!

What is Credit?

Credit is someone willing to let you use their money and it's also tool that can buy something now and you can pay it later.


Credit History is what helps you qualify for good deals on loans, credit cards, insurance, and more.


You want to have a credit history and a good credit score. Both of those are what the bank looks at when you ask for a loan. If you have good credit history and score they will be willing to give the loan at a good interest rate. But if you have a bad credit they might not give you all of the loan and if they do, it will be at a high interest rate.

What is Principal?

The Principal is the original value of the item or the amount you have borrow from someone including Interest

What is Rate/Interest?

The Interest is the amount you pay to use someone else's money.


There are two different types of Interest Rates. You have Fixed Interest Rates and Variable Interest Rates, we will go over those in a second.

The Time~!

The Time is a need to know, so will be able to come up with the money in time so you will be able to pay each month.

The Time to the amortization schedule of when you pay it all off will depend on your income. If you make a decent amount you can get right of your loan in 2 years or 3. But if you are making a lot of money an just want to pay it all off quick you can but you will have to pay earlier payment fee which can actually be cheaper than actually paying it off over time.

The Difference between Fixed and Variable Interest.

Fixed Interest Rates: stay the same for life of the loan or account


Variable Interest Rates: Change at specified times


You will want to always have a Fixed Interest Rate so you will know exactly how much interest you will be paying.

If you had a Variable Interest Rate you will not know how much you will be paying for each month so you will not know how much money that you should set aside for the loan or account.

Simple Interest and Example!

What is Simple Interest?

Simple Interest is the principal amount times Interest time Time. P*R*T (Principal * Rate/Interest * Time)

Example

At a Fixed Rate/Interest of 7%

You got 180 days to pay it off

And the Principal is $6,000

So How much is interest?

Well get the 7% * 180/365 * 6,000 = $207.12

So Interest is $207.12

Amortization Schedule

This Amortization Schedule shows you how much interest you pay each month and principal.
An Amortization Schedule is a really good thing to have when you get a loan or making a payment on a hour or car~!
It will show how to pay every month and when you will be down making the payment~!

The 6 C's of Credit!

The 6 C's of credit are the things you should remember when getting or using a Credit card~
1. Character - a person with good character is willingly and responsibly lives up to the agreement/contract.
2. Capacity - to be able to repay a loan or make some payments on merchandise with present income.
3. Capital - Property and other assets that total more than debts
4.Conditions - All other existing debts, stability of employment, personal factors, and other factors that might affect a person's ability or desire to meet financial obligations are important conditions to be considered.
5. Collateral - Property or possessions that can be mortgaged or used as security for payment of a debt. If debt is not paid, these items are sold to pay it off.
6. Common Sense - A person's inner ability to make wise decisions. A loan officer or credit manager determine that you have good common sense by your answers that you give them.

20-10 Rule

So credit cards are technically loans so avoid borrowing more than 20% of your annual net income ( not including a mortgage). And any payments on those loans should not go over 10% of you monthly net income.

The Advantages and Disadvantages for borrowing

Advantages

1. If you get a loan when you have a small business, it is a great way to expand your business

2. House or Car Payment are really expensive so instead of saving money and paying it later on, you can get a loan and get that car or house a lot quicker.

Disadvantages

1. You will have to pay off the loan later on which can prove to be difficult when you are unable to actually make the money to pay each month

2. It can be really difficult to actually get a loan so if you only need a small loan you should just use a credit card.

Fraud and what to look out for!

1. "Skimming" your card, these skimmers are to difficult to notice since they are on gas pumps and ATMs but you need to Always look over your cards history to figure out if you have been "Skimmed"

2. Scam Phone call saying it can lower your Credit Card debt

A person will call you saying they are a credit card representative, and says they can lower your debt by thousands and you will be able to pay it off 5x faster but there is a catch. You have to pay a big fee and when you do, you will never see them again


Tips on Borrowing!

1. Understand the terms to the loan

You need to understand your loans by figuring out when to pay. Since some financial agency will only allow you to pay on a certain date and if you pay early or later then that date your have to pay a fee

2. Always Budget when borrowing money


You must use A budget when you borrow money so that you can ensure that you will be paying the monthly payments.

3. Think carefully to how much you are borrowing

The more you borrow money, the more you will have to pay back. If you think that borrowing only 1000 dollars and then later on you have to pay back that 1000. Nope, you have to back that $1000 plus the interest.

4. Make a plan to pay off debt

Now when you borrow the money you need to make a plan to pay it off and on how long it will be when you do.

Borrowing Myths

1. Carry a balance on your credit card; it helps your score
NOOOOOO~! There is no way that carrying a balance on your credit card will help your score. Each month you should pay off you card in full and on time, that is what helps your score.
2. Opening a credit card will hurt my credit score
Opening a credit card will only drop you score by an handful of point about 5 points but if your score is around 700s you will be fine. if in 600-500 range you should consider getting a secured card to improve your card.
3. Making the minimum payment is enough
well your credit card manager typically require a minimum payment each month but then interest gets added on to the principal, then your paying more money then you should. So you always want to pay your credit card off in full.
4. The 0 percent introductory APR will last forever
here is the catch, when you have a zero percent APR means you wont have to pay any interest for only like 6 to 18 months. The 0% introductory APR does NOT last forever and when that period is over you will be surprised on how high you APR actually is, it can range from 11% to 20% or even more.