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Consumer Credit - Coggle Diagram
Consumer Credit
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Collect info from banks, lenders, merchants.
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Credit: Arrangement to receive goods/services now, pay later.
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Switch from BR to SBR
- SBR = Standard Base Rate, same for all banks.
- Monthly payments change only if OPR changes or if your credit risk goes up.
- Makes it easier to compare loans between banks.
Loan interest rates
- Existing borrowers: Rates stay the same.
- New borrowers: Rates mostly the same but may depend on your credit history.
APR (Annual Percentage Rate)
- Shows the yearly cost of a loan as a percentage.
- Helps you compare loan rates from different banks.
What to check when applying for loans
- Compare Effective Lending Rate (ELR) = SBR + bank’s spread.
- Check Product Disclosure Sheet (PDS) for total repayment and rates.
- Plan for changes in monthly payments if OPR changes.
Benefits of SBR
- Clear and transparent.
- Easier to compare loans and make smart choices.
Finance charge
- Total cost of using credit.
- Includes interest, fees and credit-related insurance.
Tips to save on interest
- Shorter loan term = less total interest.
- Lower risk to bank = lower interest:
- Offer collateral
- Bigger down payment
- Accept variable rate
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Check credit report (CTOS, Experian, Credit Bureau Malaysia)
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Rights under CRAA 2010: Access, correction, notification, privacy
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Closed-End Credit: One-time loan, fixed payments (e.g., mortgage, car loan, installment purchase).
Open-End Credit: Use as needed up to a limit (e.g., credit cards, department store cards).
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Managing Debt
- Tell creditors if you can’t pay.
- Debt collectors must send written notice within 5 days.
- You have 30 days to verify or dispute the debt.
Why People Get Into Debt
- Overspending or emotional spending.
- Keeping up with others.
- Poor family money communication.
-High interest/finance charges.
Warning Signs
- Paying only minimum
- Balances keep growing
- Late or missed payments
- Using savings or overdrafts for bills
Consequences
- Stress, health problems
- Job loss or garnishment
- Neglecting children
- Marital problems
- Bankruptcy
Simple Interest
- Interest is only on the original loan (principal), no compounding.
- Formula: Interest = Principal × Rate × Time
(I = P × r × T).
- Declining balance: Interest is only on the unpaid principal. More frequent payments = less interest.
Add-On Interest
- Interest is calculated on the full original loan.
- Added to principal, then divided by number of payments.
- Results in a higher effective interest rate than stated.
Cost of Open-End Credit
- Includes credit cards, store cards, and overdraft accounts.
- Lenders must show APR and how finance charges are calculated.
Methods to Calculate Finance Charges
- Adjusted Balance: Payments subtracted before interest calculation.
- Previous Balance: Payments not subtracted before interest calculation.
- Average Daily Balance: Most fair. Adds daily balances, divides by days in billing period, multiplies by monthly rate. Can include or exclude new purchases.
- Two-Cycle Average Daily Balance: Uses two billing cycles. Banned by Credit CARD Act of 2009.
Minimum Payment
- The smallest amount you can pay to stay in good standing.
- Paying only the minimum means more interest and longer repayment time.
Rule of 78s
- Also called “sum of digits.”
- You pay more interest at the start of the loan and less as the loan decreases.
- Favors the lender.
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