Matthew Solorzano Unit 4 Lesson 3 Math notes cont'd

Matthew Solorzano Unit 4 Lesson 3 Math notes cont'd - Unit...

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Unit 4 Lesson 3 consumer math notes cont’d Wanted: Debt or Alive Click on the link below to watch the "Loan Terminology Basics" Discovery Education™ streaming movie. Loan Terminology Basics By this point, you may have developed two ideas about personal finance: It's important for you to live within your means; and Debt is bad. While the first idea is absolutely true, the second is not always true. Not all debt is bad. But how can you tell good debt from bad debt? You should understand that credit card debt is the worst type of debt. Credit card debt should be paid in full every month. If you can't do that, you should make reducing your credit card debt your top priority. (The average credit card interest rate is 12.99%, which is far higher than any savings account.) But there is another form of debt—debt with collateral. Debt that includes collateral is called secured debt. This means that when you borrow money from a bank to buy something like an automobile or a piece of real estate, the bank lends you the money to buy the car or house. The bank, however, owns the house until you pay back the loan and interest. This means the bank legally owns "your" car and "your" house while you owe the bank money. They allow you to use their car and their house—and make no mistake about it, the car and the house belong to them, not you—and should you fail to pay them in a timely manner, they will reclaim their property, and your credit will be damaged in the process. What is debt that includes collateral called? Answer: secured debt Credit cards are an easy way to keep track of expenses, but they are also an easy way to quickly accumulate debt.
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You may have done something similar to this as a child. If a friend wanted to borrow a doll or a video game, you'd make them give you something they valued as "security." You'd hold that item until your doll or game was returned. When they were finished playing with your toy, you'd give them back their stuff and that would be it. Banks follow the same general procedure, except that they charge you interest on the loan while keeping ownership of the property. In an upcoming lesson, you will learn at length about secured versus unsecured debt. For now, the important thing to realize is that secured debt is better than credit card (unsecured) debt. I'm Feeling Very Insecure But why is this so? "Why is this so-called secured debt so much better than credit card debt? I'm being charged interest just the same!" There are two reasons: First, the interest rate on a secured loan is lower than a credit card's interest rate. Remember, the bank has an asset (your car or house), and the asset means the bank is taking less of a risk. For instance, if you rack up $10,000.00 in credit card debt and you default, the credit card company loses $10,000.00. They don't like to lose money, so they charge a high interest rate to cover that risk. But if you take out a car loan for $10,000.00 and you default, the bank will hire a repossessor to find your car. They will then sell it at an auction and hopefully get back most of the loan. This means that the bank has only the difference between the loan and the auction value
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