Read to Learn

Explain one major difference between credit

cards, installment loans, and mortgages.
Indicate at least three ways to maintain a good
credit rating.
The Main Idea
There are several similarities between credit cards,
installment loans, and mortgages. There are also
differences. Keeping a good credit rating is
important if the consumer is interested in getting
loans at a reasonable cost.
Key Concepts
Understanding Loans and Mortgages

Keeping a Healthy Credit Record

Understanding Loans and Mortgages
Loans and mortgages allow consumers to borrow money that will be
paid back with interest.
How Installment Loans and Mortgages Work
A loan is money lent by one party to another with interest, usually
requiring collateral.

A mortgage is a loan agreement secured by property, usually the item

that the mortgage is for, such as a home.
How Installment Loans and Mortgages Work
Installment or mortgage loans can
have a variable rate of interest or a
fixed rate of interest.
variable rate
an interest rate that
fluctuates or changes over
the life of the loan
fixed rate
an interest rate that stays the
same over the life of the loan
How Installment Loans and Mortgages Work
Installment and mortgage loans
usually require the applicant to give
a down payment. down payment
a portion of the total cost
that is paid when a product
or service is purchased
How Installment Loans and Mortgages Work
On a simple interest loan, interest is
based on the original principal
alone. principal
the amount of borrowed
money that is still owed and
on which interest is based
How Installment Loans and Mortgages Work
A finance charge includes the
interest and any other charges, such
as the application fee. finance charge
the total amount it costs the
borrower to have the lender
finance the loan
How Installment Loans and Mortgages Work
A mortgage is an example of a
secured loan.
secured loan
A credit card debt is an example of a loan that is backed by
an unsecured loan. collateral

unsecured loan
a loan that is not backed by
collateral
How Installment Loans and Mortgages Work
Secured loans usually carry a lower
interest rate.
Keeping a Healthy Credit Record
To continue using credit or to get new credit, you need to maintain a
good credit rating score.

To get the best credit rating, you need to pay your bills on time.
Figure 26.1 Factors That Affect Your Credit Score
 Staying Within Your Income Limits
Experts say consumers should not use more than 20 percent of their
income for credit payments.
 Graphic Organizer

Your Income Your Debt What You Want

$120 for A new

$2,000 per
entertainment
Can
month Student Loans
center for $50 You
$1,500 after
$160 for Car
per month for Afford
taxes three years
Payments It?

Remember Your total

payments each
You should not use more than 20 month would be
percent of your income for credit No $330, or 22
percent of your
payments. take-home pay.
Graphic Organizer
Signs of Credit Trouble

You cannot make monthly loan payments and

minimum monthly payments on your credit cards.

You receive second and third payment-due

notices.

You get calls from bill collectors.

Signs of Credit Trouble
Another sign of credit trouble is
when a creditor arranges a
garnishment of wages.
garnishment of wages
a court order take all or part
of a debtor’s paycheck if he
or she stops making
payments
Signs of Credit Trouble
Another sign of credit trouble is
when a creditor is forced to
repossess an item you purchased. repossess
taking back an item
1. Which type of loan usually carries a lower
interest rate—a secured loan or an unsecured
loan?

a secured loan because it is backed by

collateral and, therefore, involves less risk
2. What is the maximum percentage of your
income that you should allocate to credit
payments?

20 percent
3. What is a garnishment of wages?

a court-ordered act of taking back all or part of

a debtor’s paycheck if payments are stopped
Start Your Own Micro-lending Business
1. Comply with registration requirements. The company must be in
the form of a corporation so it must register with the Securities
and Exchange Commission (SEC). ...
2. Know the current legal requirements. ...
3. Study your target market. ...
4. Hire the right employees. ...
5. Learn how to screen and collect from clients.