Debt

Debt

You Will Learn

• About the many myths that surround the use of credit.

• You will learn about credit bureaus and consumer credit laws

• You will develop a plan for protecting personal information.

Key Terms

• Annual fee: A yearly fee that is charged by the credit card company for the convenience of the credit card

• Annual fee: A yearly fee that is charged by the credit card company for the convenience of the credit card

• Credit card: Type of card issued by a bank that allows users to finance a purchase

• Credit report: A detailed report of an individual's credit history

• Credit score: A measure of an individual's credit risk; calculated from a credit report using a standardized formula

Key Terms cont'd

• Debt snowball: Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments

• Depreciation: A decrease or loss in value

  
  

• Introductory rate: An interest rate charged to a customer during the early stages of a loan; the rate often goes up after a specified period of time

• Loan term: Time frame that a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated for another term

The 2nd Foundation

GET OUT OF DEBT!

Things to Consider

• When someone borrows money from another, we understand they have an obligation to repay

• "The rich rule over the poor, and the borrower is slave to the lender"

• The Second Foundation is Get Out of Debt. But don't stop there! Keep it up and commit to living a debt-free life!

Video 1.1a: Debt is Everywhere

Debt is Everywhere

• Almost 70% of Americans are living paycheck to paycheck.

• When it comes to debt, if you tell a lie or spread a myth long enough, eventually it becomes accepted as the truth.

• Debt has been marketed to us with such intensity for so long that to imagine living without it requires a complete paradigm shift - a completely new way of looking at things.

Video 1.1b: Debt is a Product

Video 1.2a: Marketing Debt

Video 1.2b: Slave to the Lender

Video 1.2c: Financial Myths Young Adults Fall For

Review: Financial Myths Young Adults Fall For

• The first one is the belief that you have to build credit.

• The second myth is that you can spend money on whatever you want while in college and pay for it later when you’re making more money.

• The third myth is that you need a new car. You should buy the car you can afford - with cash

• Don’t fall for these myths. Avoid debt, save for emergencies and large purchases, and learn to say no, even people around you won’t.

Debunking the Credit Myth

Video 2.1a: Money Myths

Money Myths

• MYTH If I loan money to a friend or relative, I will be helping them.

• TRUTH The relationship will be strained or destroyed.

• MYTH By co-signing a loan, I am helping out a friend or relative

• TRUTH The bank requires a co-signer because the person isn’t likely to repay. Be ready to pay the loan and have your credit damaged.

Money Myths - Part 2

• Cash Advance, payday lending, rent-to-own, title pawning, and tote-the-note lots are needed services for lower income people to help them get ahead.

• These are horrible, greedy rip-offs that aren't needed and benefit no one but the owners of these companies.

Money Myths - Cont'd

• The lottery and other forms of gambling will make me rich

• The lottery is a tax on the poor and on people who can't do math.

Secured vs UnSecured Loans

An unsecured loan is given to borrowers based on their financial resources or ability to repay the loan. Nothing "secures" the loan. In other words, the lender does not have rights to a specific asset if the loan is not repaid. Personal loans, student loans, and personal lines of credit are examples of unsecured loans.

Secured vs UnSecured Loans

A secured loan is usually needed when borrowing large amounts of money. The loan is "secured" with collateral. In other words, if you default on the loan and your house was used as collateral, the lender would take the house. Secured loans usually have lower interest rates and longer repayment terms. Automobile loans, mortgages and home equity loans are examples of secured loans.

Video 2.1b: Money Myths P2

Teen Thoughts on Loaning Money

Have you ever loaned someone money, only to have it turn into a bad experience?

Pay Cash for Your Car

The Third Foundation is paying cash for your car. We teach people not to borrow money, period. But there are a few more reasons to avoid financing a new car.

Video 2.2a:

The Truth About Car Loans

The Truths About Car Loans

• MYTH Car payments are a way of life, and you'll always have one.

• TRUTH Staying away from car payments by driving reliable used cars is what the typical millionaire does. That is how they became millionaires.

Video 2.2b: Say No to Car Payments

Three huge ways you lose when buying a new car:

#1 - Payments.

Spreading the purchase of an automobile over four or five years hinders your ability to pay off debt or save money for that time.

Three huge ways you lose when buying a new car:

#2 - Interest.

Included in the payment, of course, are the interest charges. That means you pay more than the sticker price. It's like buying a $20,000 vehicle for $23,000.

Three huge ways you lose when buying a new car:

#3 - Depreciation.

This is the biggest one. If you purchase a $20,000 car, it will be worth about $8,000 in four years. That's in addition to all the gasoline, maintenance and other stuff. You could buy a $2,000 beater and get the same use out of it for those same four years without taking a $12,000 hit. Save a few thousand dollars and buy a used vehicle with cash (getting a discount by flashing the money), and you'll ride with a lot more peace of mind.

The Power of One Decision

Don't make car payments a way of life! What if we decided that enough was enough? What if we decided to hang on to our money instead of sending it all to the bank in the form of payments? What if we got really radical and devised a plan to make our money work for us, instead of letting it work for the bank? 

Video 2.3a: The Truth About Car Leases

The Truth About Car Leases

• MYTH - Leasing your car is what sophisticated financial people do. You should always lease things that go down in value. There are tax advantages.

• TRUTH - Consumer Reports, Smart Money magazine, and a good calculator will tell you that the car lease is the most expensive way to finance and operate a vehicle.

Truth About Car Leases

If you own a business, you can write off your paid for car on taxes without making payments for the privilege.

The way to minimize the money lost on things that go down in value is to buy slightly used.

A car lease is a long-term rental agreement; a form of secured long-term debt.

Video 2.3b: The Truth About New Cars

The Truth About New Cars

• MYTH - You can get a good deal on a new car.

• TRUTH - A new car loses 70% of its value in the first four years. This is the largest purchase most consumers make that goes down in value.

Buying A House

• MYTH - I'll take out a 30-year mortgage and pay extra on it. I promise!

• TRUTH - Life happens and something else will always seem more important. Never take out more than a 15-year fixed rate mortgage.

Buying a House

What Do Fixed and Variable Rates Mean? 

With a fixed rate mortgage, the interest rate is set when you take out the loan, and it will not change. Therefore, your monthly payments will never change. Variable rate mortgages (or adjustable rate mortgages—ARM) will start with a lower rate. This initial rate may stay the same for months or years. But when this "introductory period" is over, your interest rate will change and the amount of your monthly payment will likely go up.

Video 2.4b: 15 vs 30 Year Mortgage

Credit Cards

• MYTH - You need a credit card to rent a car or make a purchase online or by phone.

• TRUTH - A debit card does all of that. The only thing you can’t do with a debit card that you can do with a credit card is go into debt.

Credit Card - Cont'd

• MYTH - I pay my credit card off every month with no annual payment or fee. I get brownie points, air miles, and a free hat.

• TRUTH - When you use cash instead of plastic, you spend 12-18% less because spending cash hurts.

• MYTH - I'll make sure my teenager gets a credit card so he or she can learn to be responsible with money.

• TRUTH - Teens are a huge target of credit card companies today. The reason is that the adult market is saturated. 

Video 2.5c: Teenagers and Credit Cards

Video 2.5d: Credit Card Branding Wars

Video 2.6a: Debt vs Wealth Building

Video 2.6b: Debt vs Wealth Building P2

What About Credit Card Rewards

My credit card has no annual fee, and I get money back from the credit card company for all of my charges. I only use it for bills and I pay it off every month, so I'm getting money from the credit card company for using their credit card. What's wrong with that?"

Video 2.6c: Don't Give Up

Getting Out of Debt

• Debt Snowball: List your debts in order from smallest to largest. Pay minimum payments on all your debts except for the smallest one, and attack that one with intensity! 

• Credit Counseling - Companies that offer consumer credit counseling service can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a home mortgage loan, you will be treated the same as if you had filed Chapter 13 bankruptcy.

Getting Out of Debt P2

• Foreclosure: Process by which the holder of a mortgage sells the property of a homeowner who has not made interest and/or principal payments on time as stipulated in the mortgage contract.

  
  

• Repossession: Process of a lender taking something back (like a car) for failure to make payments

• Bankruptcy: A legal procedure for dealing with debt when an individual or business cannot repay what they owe.

Getting Out of Debt

• Garnishment: A court-ordered attachment that allows a lender to take monies owed directly from a borrower's paycheck; only allowed as part of a court judgment.

  
  

• Surrender of collateral: In a bankruptcy proceeding, a debtor can give up property (collateral) to the creditor in exchange for a clean slate.

• Delinquency: Broadly refers to a borrower not being current on his or her payments.