Consumer Banking

Dollars and Sense

Interest Rates – Rules of

• Commercial Banks – Interest rates charged for loans higher than Savings Banks and interest paid on savings accounts lower than Savings Banks

• Savings Banks – Interest rates charged on loans lower than Commercial Banks and interest paid on savings accounts higher than Commercial Banks

Interest Rates - Compounding

• Compounding is the practice of calculating interest by adding interest payments to the principal and then calculating the next interest payment based on the previously combined principal and interest.

• The amount of interest earned using this technique is called the APR – Annual Percentage Rate

• Formula – A=P(1+r/n)nt

Credit Cards

• Bank Cards – issued through banks or financial arms of firms

• No annual membership fee• No charge if bill paid in full by due date• Allows installment paying• High interest rates if using installment plan (17% -

25%)• Credit limit set by lender• Example – Visa and MasterCard

Credit Cards

• Bank and Entertainment Cards – issued by financial services companies

• Originally available only for business use, now to anyone

• Annual membership fee• Bill has to be paid in full at end of billing cycle• Credit limit set by issuer• Example – American Express

Credit Cards

• Charge plates – credit cards issued to customers by retailers

• No annual membership fee• Installment payment terms available similar

to that of Bank Cards with similar interest rates

• Credit limit set by issuer• Can only be used in issuer’s store

Debit Cards

• Basically a type of ‘plastic’ check• No credit requirement• Money available to user linked directly to

funds in savings or checking account• When used, funds immediately withdrawn

from user’s account

The 4 C’s of Credit

• Capacity – borrower’s ability to repay loan• Collateral – asset that can be used by lender

to repay loan if borrower defaults• Character – borrower’s work and residency

histories

Basic Consumer Loans

• Mortgages – Fixed Rate and Adjustable Rate Mortgages (ARMs) – collateralized loan

• Car Loans – Fixed Rate collateralized loan• Student Loans – Fixed below market rate

subsidized (by Federal Government) loans – Stafford Loans