Chapter 8 Loans
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Step 4: Determine the total payback amount. Add the loan amount and the
amount of fees.
total payback amount = loan amount + amount of fees
total payback amount = $75 + $18
total payback amount = $93
Check It
Takeo decided to take his television to a pawnshop because he needed
money. The pawnbroker gave him $85. They agreed to a 30-day contract.
He would pay a 2.2% interest fee and 21% service fee in order to reclaim his
television. How much will Takeo pay back if he returns in 30 days to reclaim his
television?
Borrow Wisely
Borrowing money should be taken seriously. When you commit to a loan or
incur credit card debt, you are promising to repay money for an extended period
of time. These payments will make an impact on your budget and your life. Don’t
be tempted to get a loan or credit that you cannot aff ord and get in a situation
where you are living paycheck to paycheck.
Sometimes individuals owe more on their cars and houses than these
assets are worth. If an individual’s assets are worth less than they owe, his or
her liabilities are probably higher than his or her assets. Since the onset of the
fi nancial downturn in 2008, many people have found themselves in situations
where they have more debt than they can aff ord. Some borrowers have
discovered that their loans are higher than their houses or cars are worth. This is
known as an upside down loan. With the downturn in the economy, many assets
have lost part of their value. Borrowers are fi nding that they owe more money on
their assets than they would get if they sold those assets.
Foreclosure
As discussed earlier in this chapter, loans generally require collateral. When
the loan is not repaid under the terms of the agreement, the property pledged
as collateral can be seized. This type of seizure of assets is called repossession.
When a home is repossessed, it is referred to as foreclosure. Foreclosure is when
the ownership interest in a piece of real estate is transferred to the lender. During
the fi nancial crises that began in 2008, those who could not aff ord monthly
payments defaulted on their mortgages in record numbers. This led to high rates
of foreclosure. With demand for homes severely depressed, banks were unable
to sell foreclosed houses, leading to excess supply and lower prices.
Bankruptcy
If a person or entity gets into a situation in which it is not possible to pay
debts as the payments are due, the person or entity is considered bankrupt.
In legal terminology, a person or business can enter bankruptcy either to settle