Chapter 16.2

Open-ended credit – An agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit. Borrower is to repay amount borrowed within

30 days? (open 30 day accounts) Borrower is to repay amount borrowed over a

period of months or years?(revolving credit)

Open 30 –day accounts Must pay full

balance each month when bill is received

Revolving Credit Consumer has

option of paying in full or making payments at least as high as the stated minimum

Most all-purpose credit cards like visa/Master Card and department store cards(Penny’s)

OPEN-END CREDIT CLOSE-END CREDIT Loan is a reflection of

varying types of charges made by borrower

Allows continuous borrowing and varying repayment amounts

Example: Credit cards that allow continuous charging like “Visa”

Loan is for a specific amount and must be repaid in full by a stated due date

Repayments are fixed amounts(installments)

that include principal plus interest Example: Buying a

refrigerator using credit or buying a car

OPEN-ENDED CREDIT CLOSE-ENDED CREDIT No down payments

requiredSERVICE CREDIT Having a service done now and paying for it later Example: telephone and utility services which

usually offer budget plans resulting in lower monthly payments

Usually a down payment is required

The product purchased with loan becomes collateral for the loan

Often referred as an installment loan

Retail Stores (department stores, restaurants, and most service businesses)Often offer their own credit cards and also

accept the major credit cards. Often give discounts or incentives to use their own credit cardMajor Credit Card Companies(master card/visa)

Often has cash advance option and access checks

Banks and Credit Unions (offer credit cards and installment loans)

Two Types of small loan finance companies Consumer Finance Company Sales Finance Company

Usually charge higher interest rates for the use of their money. Why? They are willing to take higher risks that banks and credit unions are not willing to take

If someone is unable to get a loan at a bank or credit union, they can often get one at a small loan company.

Consumer Finance Company

Sales Finance Company

Makes mostly consumer loans to customers buying consumer durables (items expected to last several years…car,refigerator)

Makes loans through authorized representatives. For example, GMAC finances General Motors automobile dealers and their customers.

Beware of these lenders They are unlicensed They charge illegally high interest rate They just may break your legs if you

don’t pay the money back!

Legal lenders that make high-interest loans based on value of personal possession pledged as collateral

Loan amount is usually set at a value considerably less than the value of item pledged.

Some Pawn shops give only 10 to 25% of value of article pledged. Most give no more than 50%

to 60%.

Most common source of cash loans. Includes parents, other relatives, friends,

etc. May or may not charge interest.

LIFE INSURANCE POLICY CERTIFICATE OF DEPOSIT Policy holders can

borrow at low interest rates against the value of their policy

Loan does not have to be repaid

Amount of loan will reduce value of policy

Certificate used as collateral

Interest charged is usually only 2 to 5 % above the interest rate received oncertificate

Certificate retains full value