Personal Loan

Lecturer: Jieyu LIN 林洁瑜

Assistant Professor

1
What is consumer credit
Credit is an arrangement to receive cash, goods, or services now
and pay for them in the future

Consumer credit refers to the use of credit for personal needs by

individuals and families

2
Advantage of Credit
• Consumer credit enables people to enjoy goods and services now and
pay for them through payment plans based on future income
• It is safer to use credit without carrying a large amount of cash
• No financial charges are assessed if the balance is paid in full each
month on time (credit cards)
• Some other benefits

3
 Advantage of Credit
• Some other benefits provided by many major credit cards
 Accidental death and dismemberment insurance when you travel on a common
carrier (train, plane, bus, or ship)
 Worldwide auto rental collision damage waiver for damage due to collision or
theft
 Roadside dispatch referral service for emergency roadside assistant
 Redeem your points or miles for gift cards, cash, or to book travel from airfare,
hotels, and rental cars to vacation packages
 Damage and theft purchase protection
 No foreign transaction fees

4
Disadvantage of Credit
• Temptation to overspend
• Reputation problem
• No increase in total purchase power
• Interest needed to be paid

5
Types of Credit
• Closed-end credit
 It is used for a specific purpose and involves a specified amount
 Types: mortgage loans;
automobile loans;
installment sales credit;
installment cask credit;
single lump-sum credit

6
Types of Credit

• Installment sales credit is a loan that allows you to receive

merchandise, usually high-priced items such as large appliances or
furniture. You make a down payment and usually sign a contract to
repay the balance, plus interest and service charges, in equal
installment over a specific period.

7
Types of Credit

• Installment cash credit is a direct loan of money for personal

purposes, home improvement, or vacation expenses. You make no
down payment and make payments in specified amounts over a set
period

8
Types of Credit

• Single lump-sum credit is a loan that must be repaid in total on a

specified day, usually within 30-90 days. Lump-sum credit is
generally, but not always, used to purchase a single item.

9
Types of Credit
• Open-end credit
 You do not apply for open-end credit to make a single purchase, as
you do with closed-end credit. Rather you can use open-end credit to
make any purchases you wish if you do not exceed your line of
credit, the maximum dollar amount of credit the lender has made
available to you.

10
Credit Cards

11
Credit Cards
• Extremely popular (the Secret History of Credit Cards)

12
Credit Cards
• Extremely popular (the Secret History of Credit Cards)
• Convenience users (who are also called “deadbeats”) are those
cardholders who generally pay off their balances in full each month.
• Borrowers (who are also called “revolvers”) carry balances beyond
the grace period and pay the finance charges

55 Million V.S. 90 Million

13
Credit Cards
• Extremely popular (the Secret History of Credit Cards)
• Convenience users (who are also called “deadbeats”) are those
cardholders who generally pay off their balances in full each month.
• Borrowers (who are also called “revolvers”) carry balances beyond
the grace period and pay the finance charges

55 Million V.S. 90 Million

14
Case for presentation

Pick a credit card issued by a bank in Hong Kong and derive a

case study on it

15
Debit Cards

Debit Cards (also called bank cards, ATM cards, cash cards, and
check cards) electronically subtract from your account at the moment
you buy goods or services

16
Stored-valued (or Gift) Cards

Stored-value cards (also called gift cards or prepaid cards) is a typical

debit card, using magnetic stripe technology to store information and
track funds. It is usually issued by large retailers

17
Mortgage Loan

A mortgage loan is a loan used either by the purchasers of real

property to raise funds to buy real estate, or by existing property
owners to raise funds for any purpose while putting a lien on the
property being mortgaged

18
Mortgage Loan

Borrower: individuals who mortgage their home

businesses who mortgage their commercial property
Lender: financial institution,
like a bank, credit union, or a building society

19
Mortgage Loan--Exercise

You took out a $100,000 30-year mortgage. How much is the monthly
installment if APR=12%.

20
Recall the present value table of annuity Per-period inters rate

1% 2% 3% 4% 5% 6% 7% 8% 9%
10 9.47 8.98 8.53 8.11 7.72 7.36 7.02 6.71 6.42
20 18.05 16.35 14.88 13.59 12.46 11.47 10.59 9.82 9.13
50 39.20 31.42 25.73 21.48 18.26 15.76 13.80 12.23 10.96
100 63.03 43.10 31.60 24.50 19.85 16.62 14.27 12.49 11.11
200 86.33 49.05 33.24 24.99 20.00 16.67 14.29 12.50 11.11
300 94.95 49.87 33.33 25.00 20.00 16.67 14.29 12.50 11.11
360 97.22 49.96 33.33 25.00 20.00 16.67 14.29 12.50 11.11
400 98.13 49.98 33.33 25.00 20.00 16.67 14.29 12.50 11.11
Number of periods PV of $1 annuity with (i%, n)
21
Mortgage Loan--Exercise

You took out a $100,000 30-year mortgage. How much is the monthly
installment if APR=12%.

Monthly rate = 12%/12 = 1%

Number of periods = 360
PV = annuity amount * PV of $1 annuity with (1%, 360)
Annuity amount = $100,000 / 97.22 = $1028.59
Total amount paid = $1028.59 * 360 = $370,294.18

22
Mortgage Loan--Exercise

You took out a $100,000 30-year mortgage. How much is the monthly
installment if APR=12%.

Monthly rate = 12%/12 = 1%

Number of periods = 360
PV = annuity amount * PV of $1 annuity with (1%, 360)
Annuity amount = $100,000 / 97.22 = $1028.59
Total amount paid = $1028.59 * 360 = $370,294.18

23
Credit Capacity
General rules of credit capacity: (1) Debt payments-to-income ratio
• The debt payments-to-income ratio is calculated by dividing your
monthly debt payment (not including house payment, which is a long-
term liability) by your net monthly income
• No more than 20%

24
Credit Capacity

25
Credit Capacity
General rules of credit capacity: (2) Debt-to-equity ratio
• The debt-to-equity ratio is calculated by dividing your total liabilities
by your net worth (not including your home or the mortgage).
• No more than 1

26
Credit Capacity
General rules of credit capacity: (2) Debt-to-equity ratio

27
Credit Capacity
General rules of credit capacity: (2) Debt-to-equity ratio

28
THANK YOU

29