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Understanding the Loan Process: Key Concepts and Interest Rates

Learn why it's important to understand the loan process and how consumers can avoid being taken advantage of. Familiarize yourself with key concepts like interest rates and credit scores. Calculate monthly payments and total interest paid using the interest rate formula. Discover the differences between home loans, credit cards, and car loans. Understand the importance of interest rates and building a good credit score.

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Understanding the Loan Process: Key Concepts and Interest Rates

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  1. DWU# • Why is it important to understand the loan process? How and why might consumers get taken advantage of? What are some key concepts that an individual might familiarize themselves with before getting a loan?

  2. Interest Rates • What are interest rates? • -interest rates is the percentage the bank charges you for borrowed money • Do you want a high or low interest rate on your loans? • -The higher the interest rate the more you pay. • There is an inverse relationship between interest rates and the rate of borrowing.

  3. How can you get a lower interest rate? • Your history of borrowing money is calculated through a credit score. • If you are a good borrower - the better the score. • How do you get a high credit score? • Have a high income • Have a good history of paying back your loans • Put your names on all bills and pay them regularly • Show the bank you are worthy of borrowing

  4. Interest Rate Formula • a= p(1+rt) • a=The total amount you will pay throughout the duration of the loan • p=principle (the amount borrowed) • r=interest rate • t=time in years • Practice Problem: • 36,000 dollar loan at 10% interest rate through a five year period? (Calculate and share answer with your neighbor!) • answer : 54,000

  5. -How do you calculate your monthly payments? (divide by the number of months of your loan)5 years =60 months answer : 900 dollars per month -How much are you spending on interest over the five year period? answer: (54000 – 36000) = 18,000 dollars

  6. Home Loan • What loan will you take? The 30 year at 3.25% or the 15 year at 2.05%? Why? • How much more will you pay total for the 5.50% loan vs. the 5.25% loan? • Why might someone take the 30 year loan vs. the 15 year loan?

  7. MasterCard Credit Card • Why does your credit score determine how much interest you pay on your loan? • answer: Remember your credit score follows you everywhere. It tells the bank how much of a risk you are. The better the credit score the better the interest rate! • What is the minimum payment option on credit card? • answer: Remember, the bank wants to keep your balance high so they can charge you more interest. If you only pay the minimum payment you will not pay down the balance fast enough and the bank will make a lot of money through interest charges.

  8. Car Loan • Notice the difference in monthly payment between your five year vs. the ten year loan. Why might people select the ten year loan vs. the five year loan? • answer: smaller monthly payment • How much more will you be spending if you select the 10 year loan vs. the five year loan? • answer: 5,850 dollars • Why do car dealerships offer no money down with 0% financing with 1000 dollars cash back? Is it really 0% financing? • answer: To get you to the dealership. This is a customer incentive to buy from them. It is usually 0% financing for the first 6 months…never for the entire loan!

  9. Business Loan Why are interest rates so important when taking out a loan? answer: The lower the interest rate the less you pay the bank on borrowed money. How does a person acquire a good credit score? answer: Getting bills in your name. Paying those bills off on time and in full every month. Do not be delinquent on payments of bills or credit cards.

  10. With time remaining??? • Take your credit cards out! TICKET OUT THE DOOR TODAY!!!!!! Answer the questions and turn in on the way out! • How much do you owe on your credit card? • How much will your payments have to be in order to pay it off in 1 year? • How much will your payments have to be in order to pay it off in 3 years? • How much more total will you be spending if you wait and pay it off in 3 years vs. 1 year? • What is the most important thing you learned today?

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