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Lesson title: The Cost of Credit/ Borrowings and the Common Materials:
Forms of credit SAS
Pen
Lesson Objectives:
At the end of this session, I will be able to: References:
1. Classify the different cost of credit https://www.christiancreditcounselo
rs.org/credit-four-most-common-for
2. Differentiate the common forms of credit from each other and ms/
apply to real-life situations https://wellsfargoworks.com/busine
ss-credit-center/article/the-cost-of-c
redit-key-terms-to-consider
Productivity Tip:
“The purpose of our lives is to be happy.” — Dalai Lama.
A. LESSON PREVIEW/REVIEW
Introduction (2 mins)
Hello! Welcome to another session for credit and collection, in our last meeting we had discussed that
credit is from the Latin word credo means to trust. We also discussed the 5 C’s of credit, Capital,
Capacity, Character, Collateral and Conditions. These 5 C’s of credit will help creditors to know if we
are capable of being granted credit, and it also helps us to boost our credit line. We also discussed the
different sources of credit wherein we have identified where we could get/or borrow money. We also
have identified 4 Main sources, Family and friends, financial institutions as the most reliable source of
credit, retail stores, and loan companies.
For today we will discuss the Cost of Credit or the cost of borrowing money. There will be a cost in
borrowing money that we call interest.
B. MAIN LESSON
Activity 1: Content Notes (13 mins)
When seeking credit, there are multiple things to consider, and deciphering the terms is a good place to
start. Various items add up to the cost of credit both obtaining it and paying it off. If you understand the
terms you can gain a deeper understanding of the true cost of credit.
● A fixed rate is set when the credit is approved and will not change during the term, unless you default.
Calculating the cost of interest beyond the principal is complex and involves many variables, so we
suggest using a repayment calculator for a clearer idea of the true cost of interest rates over time.
● A variable interest rate changes over the life of a loan. Loans linked to a varying “prime rate” are
typically referred to as “prime plus” loans, meaning that the interest rate is determined by taking the
“prime rate” and adding an additional percentage (or spread) set by the lender.
2. Loan duration
Loan duration refers to the amount of time you have to pay back the loan. On the surface, a longer-term
loan will cost less on a month-to-month basis for a borrower. However, lenders generally give better interest
rates on short-term loans, because they will be paid back sooner, and so the amount you pay over the life of
the loan can be less for a short-term loan with a fixed rate than a long-term loan with a fixed rate.
For example, the monthly payment for a 30-year loan may be smaller than for a 15-year loan, but the overall
cost of the loan will be higher, due to the total amount of interest paid.
If you don’t make the minimum required payment by the end of the payment period, you will be charged a late
fee. To avoid additional penalties, the overdue amount and late fees must be paid in full with your next
payment. Besides, if you repeatedly fail to pay the required payment on time, the lender can usually raise your
interest rate.
Understanding all of these potential costs can help you make the right credit choices to meet your needs.
Researching upfront can save you headaches, time, and — most importantly, money — in the long run.
LO 2: DIFFERENTIATE THE COMMON FORMS OF CREDIT FROM EACH OTHER AND APPLY TO
REAL-LIFE SITUATIONS
Revolving Credit
This form of credit allows you to borrow money up to a certain amount. The lending institution sets a credit
limit, or the most you can borrow. In revolving credit, the borrower revolves the balance by rolling from month
to month until it is paid in full.This is the most common form of credit issued by credit cards, such as Visa,
MasterCard, and store and gas cards. Credit cards are considered unsecured credit because there is no
collateral securing the amount borrowed.
Installment Credit
Installment credit involves a set amount borrowed, a set monthly payment, and a set timeframe
of repayment. Interest charges are pre-determined and calculated into the set monthly
payments. Common forms of installment credit agreements are home mortgages and auto
loans.
Installment credit is also typically secure. Secure credit requires security for the lender. The borrower must
provide collateral, something of value pledge in order to guarantee loan repayment. If the borrower fails to
repay or defaults on the loan, the lender may confiscate the collateral. A home is an example of collateral on a
mortgage, and a vehicle on an auto loan. If the borrower were to default, the home or vehicle would be
repossessed.
This form of credit allows the borrower to pay for a service, membership, etc. at a later date.
Generally, payment is due the month following the service, and unpaid balances will incur a fee,
interest, and/or penalty charges. Continued non-payment will result in service cancellation and
can be reported to the credit bureau, affecting your credit score. Service or non-installment
agreements are very common in our everyday life. Cell phones, gas and electricity, water, and
garbage are all examples of service credit.
Activity 2: Skill-building Activities (with answer key) (18 mins + 2 mins checking)
1. Contact one or two of your friends or a family member through Facebook chat that you know that has
purchased an item through credit institutions and ask him/her the following:
b. Is there an instance where you did not meet the deadline for payment and what does it cost you?
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c. What advice can you give those people who plan on getting an item through credit?
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2. Contact another friend or a family member through Facebook chat and ask them the following:
a. Would you borrow money and buy the things that you want?
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b.Apply for a credit card and if approved, then buy things in credit
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Identification: Write your answers in the space provided before the number.
_________________1. It is derived from the Latin word credo which means I believe or I trust, which signifies
a trust or confidence reposed in another person.
_________________5. This rate is set when the credit is approved and will not change during the term, unless
you default.
_________________6. It refers to the amount of time you have to pay back the loan.
_________________7. It involves a set amount borrowed, a set monthly payment and a set timeframe of
repayment.
_________________8. An example of this is Cell phone, gas and electricity, water and other utilities.
_________________9. This form of credit allows you to borrow money up to a certain amount.
_________________11. If you don’t make the minimum required payment by the end of the payment period,
you will be charged a late fee.
True or False: Write True if the statement is correct and write false if the statement is incorrect.
_________________2. Shortening the payment period will give you less interest payments.
_________________6. Paying your electric bills late will cause you interest.
_________________7. Spending through credit cards can lessen your burden on cash.
_________________10. Being charged as a late payer for three consecutive months will result in good credit
standing.
_________________12. People get installment credit because it is the fastest way to get what they want.
_________________14. People love to buy something on credit means people have the capacity to pay.
C. LESSON WRAP-UP
Activity 4: Thinking about Learning (5 mins)
In this part of the module, we will track your progress on how well you are doing in this subject module.
You can highlight the number of modules that you have already finished.
2. Does this topic enlighten you to become more responsible when the time comes that you need to
borrow money?
FAQs:
1.Why do people engage in installment credits in getting gadgets and appliances?
- People engage in installment credits especially on gadgets and appliances because for them it is the
easiest way to get what they need. They just have to pay for the monthly payment until they finish the period
they are in. And nowadays many credit institutions are offering low monthly amortization on gadgets and
appliances with no collateral, you just have to pass some documents that will and may grant you credit.
3. What rate is good when it comes to loans? A fixed rate or a variable rate?
- if you want fixed rate then the fixed rate will always be good, as long as you can pay on time,
because you don’t want your loan to have penalties
- if you want variable rates, just make sure that you read what your contract in getting credit says,
remember that variable rates change over the time of your loan. Whether the rate increases or decreases over
a period of time.
KEY TO CORRECTIONS
Answer on Activity 2
- Answers will be based on the information that the student will get.
Answer on Activity 3
1. Credit True or false
2. 5 C’s of Credit 1. False
3. Creditor/ Lender 2. True
4. Borrower 3.False
5. Fixed Rate 4. False
6. Loan Duration 5.False
7. Installment Credit 6. True
8. Non installment or service credit 7. False
9. Revolving credit 8.False
10. Variable rates 9.True
11. Late Fees and over the limit penalties 10. False
11.False
12. True
13. True
14. False