AOF Principles of Finance Unit 2 Lesson 7

AOF Principles of Finance Unit 2, Lesson 7 Credit and Debt Copyright © 2009– 2011 National Academy Foundation. All rights reserved.

Debt has many forms • • Debt refers to the amount that is owed as a result of borrowing. A basic loan is the simplest form of debt. Syndicated loans are reserved for large corporations. A bond is debt security issued to certain institutions such as companies and governments.

“Good” debt versus “bad” debt Good Debt Bad Debt Mortgage Credit Card School loan Retail credit card Business loan Auto loan Real estate loan Can an auto loan be considered a form of good debt? Explain.

What is credit? • • • Credit is an agreement to receive a good or service now and then pay for it later. There are many sources of credit available, including commercial banks, credit unions, and retail stores. Thousands of banks issue credit cards, but the three main credit card brands are Visa, Master. Card, and Discover. Discuss a time when you or someone you know has used credit to purchase something.

Different types of credit have different purposes • Personal installment loans • Student loan • Mortgage loan • Credit card What are some of the potential risks involved with each type of credit?

There are many costs to credit • Annual percentage rate (APR) • Interest rates • Annual fees • Origination fees • Mental/emotional weight of debt What types of personal financial planning strategies can you take to make sure that you can afford a loan?

There are many ways to manage credit and debt • • Set goals and create a budget. Understand your debt-to income-ratio. Make wise purchases. Pay down high-interest debt as aggressively as possible. Would Maria qualify for a loan if her gross monthly income is $6, 000 and her total monthly debt is $2, 000? Explain.