“A Personal Financial

Management
Presentation”

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INTRODUCTION
 Credit is an integral part of the
human lifestyle.
 Consumer credit is readily available.
 It is important to understand the role
of credit in civil society.
 This involves the consideration of:
 Institutions
 Instruments
 Lending practices
 Legal framework

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WHAT IS CREDIT?

“power to buy or borrow on trust”

… Macquarie Dictionary

 Consumer credit is used to meet

personal needs.
 Credit increases purchasing power in
the short term.
 However, credit does not increase
total purchasing power because
interest and principal must be
repaid.
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Credit
an arrangement
to
receive cash,
goods, or services
now and pay for Using Consumer Credit Wisely
them in the future When you borrow money or charge an item
to a credit card, you are using credit. A
Creditor creditor can be:
an entity that ... A financial institution
lends money ...A merchant
consumer credit
...An individual
the use of credit
for personal
Needs

Consumer
credit
the use of credit
for personal
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needs
 Factors to Consider Before
Using Credit
Before you decide to finance a major
purchase
by using credit, consider:
• Do you have the cash you need for the
• down payment?
• Can you afford the item?
• Could you put off buying the item for a
while?
• What are the costs of using credit?
Make sure the benefits of making the 5
 Advantages of Credit
Using consumer credit allows you to:
• Enjoy goods and services now and pay
for them later.
• Combine several purchases, making
just one monthly payment.
• Keep a record of your expenses.
• Shop and travel without carrying a lot
of cash.

If you use credit wisely, other lenders

will view you as a responsible person
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 Disadvantages of Credit
Always remember that credit costs
money. If
• you fail to repay a credit card balance:
• You can lose your good credit reputation.

You may also lose some of your income

and property, which may be taken from
you in order to repay your debts.

You should always approach credit with

caution and avoid using it for more than
your budget allows.
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Types of Credit

There are two basic types of consumer

credit:
 Closed-end credit.
 Open-end credit.

You may use both types during your

lifetime because each has
advantages and disadvantages

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Open-End Credit
Open-end
credit Examples of open-end
credit as a loan
with a certain
credit include:
limit • Department store credit
on the amount of
money you can cards
borrow for a • Bank credit cards (Visa
variety of goods
and services. or MasterCard)
Line of credit
You can use your credit
the maximum card to make as many
amount of purchases as you wish,
money
a creditor will as long as you do not
allow a credit exceed your line of
user to borrow
credit.
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Closed-End Credit
Closed-end credit is used
Closed-end
credit for a specific purpose and
credit as a
onetime
involves a definite amount
loan that you of money.
will pay back
over Examples of closed-end
a specified
period
credit include
of time in • A mortgage.
payments of
equal • Vehicle loans.
amounts.
• Instalment loans for
These types of loans usually carry lower
purchasing furniture or
interest
large appliances.
rates than open-end credit carries.
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 Sources of Consumer Credit
Many sources of consumer credit are
available, including:
 Commercial banks.

 Credit unions.

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Nominal and Effective Interest
Rates
 Nominal rates are the stated interest
rates expressed in ‘per annum’
terms even though the rates may be
compounded more frequently than
annually.
 e.g. 12% p.a. compounded quarterly
 Effective rates are those that are
compounded only once during the
period expressed in the interest.
 e.g. 3% per month compounded monthly

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 Nominal and Effective Interest
Rates continued...

Example
 $1 is borrowed for 1 year
 Bank A: 10% interest compounded annually
 Bank B: 10% interest compounded quarterly
 Interest charged per period

Q1 Q2 Q3 Q4 Total to repay
Loan A - - - 10% $1 x 1.10 = $1.10
Loan B 2.5% 2.5% 2.5% 2.5% $1 x (1.025)4 = $1.1038

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Nominal and Effective Interest
Rates continued...
 The formula to convert nominal rates
to effective rates is:

i= 1+j m
–1
m

where
i = effective interest rate
j = nominal interest rate
m = number of compounding intervals per
period 14
 Loans

A loan is borrowed money with an

agreement to repay it with interest within
a certain amount of time. Before going to
your local bank to take out a loan, you
might want to consider:
• Inexpensive loans (family members)
• Medium-priced loans (commercial banks,
savings and loan associations, credit
unions)
• Expensive loans (finance companies,
retail stores, banks)
• Home equity loans
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 Credit
Grace period
a time period
Cards
during which
no Most credit card
finance
charges companies offer a grace
will be added period. If you pay your
to
your account balance before the due date
Finance stated on your monthly bill,
charge you will not have to pay a
the total
dollar finance charge. The cost of
amount you
pay a credit card depends on:
to use credit
• The type of credit card you
have
• The terms set forth by the 16
 Types of Cards
Debit cards allow you to
electronically subtract money from
your savings or checking account to
pay for goods or services.

Other types of cards include:

Smart cards
Travel and entertainment (T&E)
cards
(American Express)
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TYPES OF CREDIT

1. Housing Loans
 Approx. 70% of households live in a
dwelling they either own or are
buying.
 Owner-occupied housing loans are
usually calculated on principal-and-
reducing interest basis.
 Provided by banks, building
societies, credit unions and life
insurance companies.
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TYPES OF CREDIT
continued...
 A secondary mortgage market has
developed whereby lenders can
securitise their portfolio of loans.
 Formula to calculate repayments is:

C = PV
[1 – (1 + i )–n]/i

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TYPES OF CREDIT
continued...
2. Credit Cards
 Available for cash advances or to
purchase goods and services
directly.
 Charges vary with cost of interest
and fees generating conflict.
 Growth up market increased with
electronic banking (ATMs and
EFTPOS).
 Attractions include automatic billing
and loyalty rewards programs.
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 TYPES OF CREDIT
continued...
3. Personal Loans
 Provide either short of long term funds.
 May be secured or unsecured.
 Usually for 2 to 5 years.
4. Revolving lines of credit
 Borrowers can redraw on their home
loan account up to an approved limit.
 Overdraft lines of credit provided on
cheque accounts by banks.

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TYPES OF CREDIT
continued...
5. Motor Vehicle Loans
 May be secured or unsecured.
 Banks/finance companies provide
motor vehicle dealers with plans to
offer buyers.
6. Leasing Finance
 Financial institution retains
ownership of equipment and user
rents it.
 22
 TYPES OF CREDIT
continued...
7. Fully Drawn Advance
 May be provided against collateralised
real estate mortgages to enable
borrowers to purchase consumer
goods.
8. Bridging Loans
 Single repayment loan where loan is
repaid with interest at end of its term.
 Enable borrowers to purchase an asset
immediately before receiving proceeds
from sale of another asset.
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SECURITY FOR CONSUMER
CREDIT
 A security interest held by a lender:
 Enables the lender to recover losses
quickly when borrower breaches
contract.
 Provides the lender with the rank of
secured creditor, and therefore priority,
if bankruptcy occurs.
 A legal mortgage is created by
transfer to the lender of the legal
title to a borrower’s property for
security purposes only. 24
SECURITY FOR CONSUMER CREDIT
 An equitable mortgage can be created
by:
 Mere deposit of title deeds
 Intention to crease a legal mortgage
 A registered mortgage is a legal
mortgage.
 The Torrens system of land titles and
security of real estate has been long
being established for mortgaging
purpose.
 A guarantee is a promise to answer for
the debt of another person to the 25
 SECURITY FOR CONSUMER CREDIT
continued...

 Examples of loans and security

arrangements
 Loan and security arrangements with Direct
Security
Loan
Housing Loan Borrower
Lender First mortgage security

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SECURITY FOR CONSUMER CREDIT
continued...
 Loan and security arrangements involving
a third party

Loan
Housing Loan Borrower
Lender Repayment & guarantee fees

First mortgage security

and guarantee
Guarantor

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CREDIT ASSESSMENT
 Credit analysis involves both:
 Objective analysis which considers the
factual information needs of the borrower.
 Subjective analysis which considers the
borrower’s credit-worthiness and personal
financial management ability.
 Credit information is obtained from:
 The credit application form.
 Credit ratings agencies.

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 CREDIT ASSESSMENT
continued...
 Credit investigation involves checking
the accuracy of the information
provided by the borrow.
 The lender seeks credit verification by
confirming information with sources
other lenders, employers, real estate
agents and licensed valuers.
 The quality and reliability of the primary
source of repayment is vital to financial
analysis.

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CREDIT ASSESSMENT
continued...
 Lenders can make two errors when
they assess loan applications.
 To lend to borrowers who are not credit-
worthy resulting in a loss.
 Disqualifying good borrower applications
may also result in a loss due to the
opportunity cost that arises.

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 SOURCES OF CONSUMER CREDIT

 Major sources of consumer credit are:

 Banks
 Finance companies
 Building societies
 Credit unions
 Life insurance companies also provide
investment and owner-occupied
finance to policy holders.

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CONSUMER REGULATION
COMPLIANCE
Benefits to Benefits to lenders
consumers  Variations of
 Full disclosure contract
 Assistance for  Taxes
reasonable cause  Variation of interest
 Default notice rates
 Access to justice  Advertising
opportunities
 Standardised
systems 32
Thank You!!!

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