CHAPTER 4: BUILD CREDIT and CONTROL DEBT

Save Money by Choosing the Right Loan

If you have good credit, you may want to take out a loan to purchase a car, or a house, or to cover educational expenses - all are investments in the future. But regardless of how the money is spent, a loan is a liability, or debt, and decreases your wealth. So choose loans carefully.

Shop and negotiate for the lowest interest rate. The interest you save can be invested to build wealth. Take a look at the table below. It may be obvious which lender will charge the lowest interest. What's not obvious is that your credit score may determine which interest rate you are offered. Obtain your credit score well before you plan to apply for a loan. Use an online auto loan calculator to compare rates. You can save interest expense by increasing your monthly payments or choosing a shorter payment term on your loans. The table also shows how shorter terms with higher payments would affect the total amount and interest on a $15,000 car loan.

$15,000 Car Loan for 5 Years

LENDERINTEREST RATETOTAL INTEREST

Pixley Bank & Trust6.5%$2,609.53

XYZ Savings & Loan7.5%$3,034.15

Joe's Auto Sales15% $6,410.94

$15,000 Car Loan at 6.5% Interest

3 - Year4 - Year5 - Year

Number of payments36 48 60

Payment amount$460 $356 $293

Total paid$16,550 $17,075 $17,610

Beware of High-Cost Credit

People can get deep in debt when they take out a loan against their paycheck or car title. These loans generally come with very high, double-digit interest rates. For example, borrowers may draw postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan. Borrowers who can't repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan's due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees.

Predatory lenders often target senior and low-income people they contact by phone, mail or in person. After her husband died, 73-year-old Bess needed financial help and fell victim to a predatory lender. Bess was struggling to make ends meet on her fixed income. To pay off her bills, she took out a $5,000 loan that carried a high interest rate and excessive fees. Soon Bess found she was even deeper in debt, so she refinanced the loan, once, then again, and again, paying fees each time.

Bess's child discovered her situation and paid off the loan.

Tips for Borrowing

-Don't borrow from Peter in order to pay back Paul

-Be aware and never respond to a solicitation that makes borrowing money sound easy and cheap

-Always read the fine print on any loan application

-Seek assistance from family members, local nonprofit credit counseling services or others to make sure a loan is right for you

Summary & Analysis

1.What is a 'Predatory Lender'? How are they dangerous?.

2.How does the text define a 'liability'? Use the term in a real-world example from your life.

3.According to the text, what is one of the main factors that determines the interest rate you are offered?

4.What are the benefits to paying off a loan in 3 years compared to 5? Why might someone elect to pay off loans over a longer period of time?

5.Why might it be harder for a senior citizen to pay off a loan compared to someone in their mid- 30's-40's?

6.Explain how each the four 'Tips for Borrowing' are beneficial:

a.

b.

c.

d.

7.How much money are you saving by taking out the 3-year car loan compared to 5-year?