AOF Financial Planning Lesson 8 Borrowing Money · Others, like auto, furniture, and electronics dealers, offer loans to help customers buy their products. Unlike most banks, these

Copyright © 2008 National Academy Foundation. All rights reserved.

AOF Financial Planning

Lesson 8

Borrowing Money

Student Resources

Resource Description

Student Resource 8.1 Reading: Why Borrow?

Student Resource 8.2 Reading: Terms of a Loan

Student Resource 8.3 Reading: Where to Borrow Money

Student Resource 8.4 Activity Instructions: To Borrow or Not to Borrow?

Student Resource 8.5 Template: Business Letter

Student Resource 8.6 Role Descriptions: Hosting an Interview

Unit 3 Borrowing and Credit

Lesson 8 Borrowing Money


Student Resource 8.1

Reading: Why Borrow?

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Bankruptcies are on the rise in the United States, as many Americans have over borrowed.




Job loss and unexpected health problems can also lead to bankruptcy.





Reading: Terms of a Loan

This presentation provides an overview of some of the most important concepts and terms in borrowing.

Through the stories of two sets of borrowers, you’ll learn about what kind of things people borrow money for, and what lenders look for when approving loans.




The majority of people who buy cars, especially new ones, borrow money in order to buy the vehicle. Cars are often an important purchase that can allow people to drive to work, especially to areas that are not easily accessible by public transportation.

A down payment is money that the buyer has to pay at the time of purchase. Most lenders require a certain percentage of the total price to be paid up front.

A credit score (sometimes known as FICO score) is meant to measure a borrowers’ ability to repay a loan. The higher the credit score, the more likely a borrower is to be approved for a loan. Making late payments or declaring bankruptcy lowers a credit score. Borrowing money and paying it back on time improves a credit score.




There are many different variables to consider when getting a car loan. The type of loan you choose can have a big impact on the total amount of money you will pay for the car.

Interest is an amount of money, expressed as percentage of the balance remaining on the loan, that a borrower must pay on a regular basis, in addition to paying off the principal of the loan. In a sense, interest is a fee you are paying to the lender for letting you use their money.

Sometimes, if a person has no credit history or a poor credit history, lenders will approve the loan if someone with a better credit history assumes joint responsibility for the loan by co-signing. The co-signer must repay the loan if the other signer defaults.

The annual percentage rate, or APR, is a more accurate way of figuring out the interest rate for a loan, as it includes any up-front fees.




Because there are so many different types of loans, it really pays to shop around for the best terms of credit!

A repayment schedule determines how often the borrower must make payments to the lender, and for how long.




Another important reason people borrow money is to buy a house or condominium. These are usually the largest loans people ever take out, and many people spend 30 years or more paying off their home loans.




A mortgage broker helps home buyers to borrow money to buy a home.

Mortgage brokers can help buyers understand how much they can afford to pay in house-related payments each month (including property taxes and insurance) and help them get a loan amount on which they can reasonably make the monthly payments.

The minimum payment is the lowest amount a borrower can afford to pay back each month, given his other monthly expenses.




By putting a down payment on a home, the buyer is able to take out a smaller loan amount. Often, banks will give better terms when a significant down payment is made. In the past, many lenders required at least a 10% down payment. More recently, lenders have allowed a 5% or even no down payment, but offered less advantageous terms.

Collateral is an asset that the buyer promises to give to the lender if the buyer cannot pay back the loan.




An adjustable rate loan has an interest rate that goes up or down, depending on the base rate to which it is tied. Adjustable rate loans can be risky, as rates go up as well as down.

A fixed rate loan always has the same interest rate, even if the prime interest rate goes up or down.




Because it often takes 20, 30, or more years to pay off a home loan, it is very important that buyers carefully choose both the amount of loan they can take out, and the terms of the loan.

A 30-year loan has a repayment schedule that spreads out over 30 years. The longer the repayment schedule, the lower the monthly payments, but the greater the total interest that will have to be repaid.

Borrowers can refinance, which involves replacing a mortgage with a different, usually better, interest rate.





Reading: Where to Borrow Money

Below are various common methods or places from which to borrow money, along with a description of

each. Read the characteristics carefully. You’ll have refer to them again for the final assignment of this

lesson. As you read, or when you are done, fill in the column “Possible Uses?” by writing down what

purchases are likely with that lending source.

banks and credit unions

Banks and credit unions offer a wide variety of loans, including personal loans, small business loans, home equity loans, home mortgages, and credit cards.

They are good place to start if you are searching for a loan because of their many options. If you build a relationship with a banker, he can help guide you to the loan that makes most sense for your needs.

check cashing storefronts

For some people it is difficult to open up a bank account or get loans, either because they have no permanent address, don’t have the money to make the minimum deposits that some banks require, or have very poor credit histories.

Check cashing stores provide some of the services that banks do, such as cashing checks and making small loans. They can be useful for those who are not able to open a bank account.

However, they usually charge much higher fees for their services than banks do.

credit cards Banks, credit unions, and other financial institutions offer credit cards. With a credit card, you are able to borrow up to the credit limit of the card, and if necessary are able to make small monthly payments on the balance of the card.

However, credit cards charge interest on the amount borrowed, and in many cases, if the terms of the card are not met (such as a late payment), the interest rates can go up dramatically.

The interest rates on credit cards are usually higher than for other loans, such as personal

Borrowing Source Characteristics Possible Uses?




loans, car loans, and home loans.

mortgage lenders While many banks offer home loans, there are some financial institutions that specialize in these loans.

Because of their specialization, they are sometimes able to provide better rates or other benefits to home buyers.

Mortgage brokers often serve as intermediaries between the buyer and mortgage lender, helping the buyer to find a loan that meets her needs, and to prepare the necessary paperwork.

businesses Many different types of businesses offer credit to buyers. Some retailers offer credit cards that can only be used to make purchases at their stores.

Others, like auto, furniture, and electronics dealers, offer loans to help customers buy their products. Unlike most banks, these companies often approve loans even to customers with no credit history or with poor credit history, thus giving them the ability to begin improving their credit scores.

The terms on these loans vary widely, so it is important to check if one can find better terms at a bank or credit union.

Because of the easy credit, one possible danger of this type of loan is that it can lead to impulse shopping—buying non-wealth-building assets that one can’t afford!





Activity Instructions: To Borrow or Not to Borrow?

For this activity, you are taking on the role of a financial planner who is giving advice to three different

clients. Each has come to you because he or she is interested in making a major purchase, but none has

enough money on hand to buy outright. Each will have to borrow money. Your job is read about their

situations carefully and to write a response for each, in a standard business letter format.

Your response should include your advice to each client about whether or not he or she should borrow

money for his or her purchase, along with your reasoning. If you do think the client should take out a loan,

in a second paragraph, advise the client on the best places to get a loan and again explain your

reasoning. Along with grammar, spelling, and completeness, your work will be assessed on how well you

take into account the purpose of the loan, the borrower’s level of need, and the borrower’s ability to repay

the loan.

Client 1: Lucy Diamond is a single mom in her forties who is bringing up four children on her own. She owns a dry cleaning business in a small town. Two of her children work after school. Lucy wants your advice—she is considering taking out a loan for $15,000 to buy new machines for her dry cleaning business. Though these machines are expensive to buy, they use less energy, and do a better job than her current machines. She thinks that in the long run, they will help her improve her profits. Is it a good idea for Lucy to borrow money for this purpose? If so, where are some places she could go to for the loan?

Client 2: Max Hammer is a semi-retired plumber, now in his late sixties. Max has found retirement challenging, as he did not save enough to live comfortably. He continues to work part time as a greeter at a large discount store, but is not earning much. He has heard that all television broadcast will be converted to high definition in a few years, and wants to purchase a new high-definition large-screen TV. He figures that since he is retired, and spends a lot of time at home, a TV would be a good investment. He found a top-end model at his local electronics store for $5,000. He wouldn’t even have to pay a penny until next year, when his interest rate would be about 10%, about the same as his credit card. There is no way Max could pay cash for the TV, as he already has maxed out the $10,000 limit on his credit card. Is it a good idea for Max to borrow money for this purpose? If so, where are some places he could go to for the loan?

Client 3: Jude Rigby is a graduate student at Ohio State University. He is in his mid-twenties. Jude wants to borrow money to help pay for graduate school. Although he has some income through teaching part time, as well as a few scholarships, he does not earn enough to make ends meet. Until he graduates in about 2 years, he needs some extra money, about $5,000 each year, just to be able to buy food and pay rent, with a little left over for a movie or a dinner out once a month. He’s thought of getting a second job, but feels that if he works more, it will just take him longer to graduate. Is it a good idea for Jude to borrow money for this purpose? If so, where are some places he could go to for the loan?





Template: Business Letter

April 27, 2008

Dear [Client Name],

I’m writing in response to your question about…

Given your situation, I recommend that…

The reason I recommend this is because…

If you need to borrow money, here are/is a place I recommend you visit…

Please let me know if you have any questions about my recommendations.

Sincerely,

[Your Name]





Role Descriptions: Hosting an Interview

An industry expert will be coming to your class to share her experiences with you. The students will be

responsible for managing the interview.

Please read the following roles. The teacher will be selecting volunteers or assigning roles. Other

students will have a chance to take a role in interviews later in the semester.

Greeter

• Make sure the guest has a comfortable place to sit that is visible to the whole class.

• Welcome the guest at the school office or at the classroom (see teacher for directions).

• Escort the guest to her chair.

• Escort the guest out at the end of the interview.

Master of Ceremonies (MC)

• Kick off the interview by briefly describing the course and the purpose of the interview.

• Call on students who raise their hands with questions.

• Keep your eye on the time, and end the interview 10 minutes before the class ends.

• Thank the guest for her participation and ask the class for applause.

Scribe

• When terms that are difficult to spell come up in the interview, the scribe will write them on the board, asking the guest for the correct spelling.

• The scribe is also responsible for writing a thank you note to the guest. The teacher will provide a card, envelope, stamp, and the guest’s address.

Documents

AOF Financial Planning Lesson 8 Borrowing Money · Others, like auto, furniture, and electronics dealers, offer loans to help customers buy their products. Unlike most banks, these