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Debt and Financing Alternatives - Coggle Diagram
Debt and Financing Alternatives
Problems Associated with Credit
Too much debt will ultimately limit what a client can do because it will create a strain on cash flow
Learn how clients feel about debt & help then to get out of debt quickly.
Qualifying for Credit
Lender considers following point when evaluating borrower (5C's) :
Lenders use credit scores to evaluate a person’s detailed financial history.
Character or apparent honesty and reliability
Capital or net worth
Capacity or income is available repay
Collateral or assets that can be used to secure the debt.
Conditions or the general economic environment.
Types of credit
Installment
Revolving
Cost of Credit: Interest charged on outstanding balances.
Mortgages and Other Installment Loans
Installment loans
Comes with finite repayment periods
Sometimes provide ready access to cash
Home mortgage - used type of long-term installment loan
The borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of the mortgage.
Regular payments on the mortgage, borrower is said to be “amortizing
Amortization schedule, show how long it will take to repay
Types of Mortgages
Graduated payment
(here, not even all the interest is paid, with unpaid amounts being added to the mortgage principal)
Interest only
(eventually, the principal amount must be repaid, but for a time, the borrower only repays interest)
Interest rates on any loan may either be fixed or variable.
Cost of an Installment Loan Over Time
Revolving Credit
Lower credit scores mean higher interest rates and possible limits on the availability of credit.
Which credit cards to get, based on factors like cost of credit, (i.e., interest rate)
Leasing versus Buying
Cost and convenience Main reasons considered in a lease.
Lessor - person or business that owns the asset and leases it to another
Lessee - person who leases or rents the asset
Types of Leases
Two basic types
Open-end:
Lessee may be required to pay the difference between the leased property’s value and the amount for which it is sold by the lessor
Closed-end:
Lessor simply takes back the leased property without damage & no additional charges.
Deciding Whether to Lease or Buy an Asset
Leasing/renting Considerations
Wants new item every few years
Not like to borrow money
No funds for a down payment
Sees lower monthly payment
temporary need
needs are changing in the near future.
Not taking ongoing responsibility of maintenance.
Buying Considerations
Long Term plan to uses
stop making payments and own the asset
Intends to use the same item over long time
Authority to make improvement
pride of ownership