The Cost of Credit

The cost of credit includes interest and other finance charges. Because there are different methods for calculating interest rates, always ask lenders for the annual percentage rate (APR). This number is calculated the same way by all lenders, so you can use it to compare rates.

Interest Rates. Each state sets limits on the amount of interest that can be charged for various types of credit. Charging any amount above the legal limit is called usury. Lenders who charge interest rates above the legal maximum may be liable for both civil and crim­inal penalties.

Interest rate ceilings vary from state to state. Generally, however, loans from banks or finance companies carry interest rates of 10 to 30% per year. Credit card companies and department stores often charge 1.5% per month (18% per year), but these rates can vary widely depending on the lender and the economic conditions at the time. Installment contracts for consumer goods such as new cars or furniture also vary widely.

Some companies now offer variable interest rates. For example, such a rate may be described as “2% over the prime rate” or a “10% variable annual percentage rate”. With a variable rate, the amount of interest you are charged changes from time to time and is comput­ed based on financial market indicators. That means your rate can go up or down with changing economic conditions. Carefully review the information provided by the lender to determine how often the rate can change and how much it can change at each adjustment as well as over the entire term of the loan. When the rate changes, your payments will change. While your payments may start out low, they could increase over time if the rate goes up.

Other Charges. Besides the interest paid on a credit sale, there are sometimes other charges that may be added onto the basic price. These include:

· Credit property insurance – insures the purchased item against theft or damage.

· Credit life/disability insurance – guarantees payment of the balance due if the buyer should die or become disabled during the term of the contract.

· Service charge – covers the seller’s cost of bookkeeping, billing, and so on.

· Penalty charge – covers the seller’s inconvenience in case of late payments. May include court costs, repossession expenses, and attorney’s fees.

Find the equivalents of the following words and expressions
in the text.

Брать взаймы; давать в долг; должник; стоимость всех элементов кредита; проценты на капитал; необеспеченный кредит; закладывать собственность; получить кредит; кредит под залог имущества; гарантия, поручительство; отказ выплачивать долги; изымать за неплатеж; фактическая стоимость кредита, выраженная в форме процентной ставки; ростовщичество; сильно различаться; плавающая процентная ставка; базисная ставка; штраф.

Answer the questions:

1. What is credit?

2. Who are creditors and debtors?

3. Do debtors usually pay cred­itors additional money over the amount borrowed for the privilege of using the credit? What is this additional money owed to the creditor is called? What is it based on?

4. What are the two general types of credit? What is the difference between them?

5. What is a collateral?

6. What can the lender do if a borrower defaults?

7. What is usury? What happens to lenders who charge interest rates above the legal maximum?

8. Why can interest rates vary widely?

9. What do you know about variable interest rates?

10. What other charges besides the interest paid on a credit sale, may be added onto the basic price?

11. Have you ever obtained a credit?

Match the words on the left with the correct definition
on the right:

Credit	additional money owed to the creditor.
Creditors	credit extended in exchange for a promise to repay in the future.
Debtors	credit for which the consumer must put up some property of value.
Finance charge	to default on the loan.
Unse­cured credit	people who lend money or provide credit.
Secured credit	charging any amount above the legal limit.
Collateral	people who borrow money or buy on credit.
Not to make the required payments	Insures the purchased item against theft or damage.
Usury	some property of value as protection in the event the debt is not repaid.
Credit life/disability insurance	buying goods or services now in exchange for a promise to pay in the future or borrowing money now in exchange for a promise to repay it in the future.
Credit property insurance	covers the seller’s inconvenience in case of late payments. May include court costs, repossession expenses, and attorney’s fees.
Service charge	guarantees payment of the balance due if the buyer should die or become disabled during the term of the contract.
Penalty charge	covers the seller’s cost of bookkeeping, billing, and so on

Problem–solving:

a. Make a list of products or services that you, friends, or family members have bought on credit.

b. What are the advantages and disadvantages of using credit to pay for college or vocational school tuition? For a car to get you to work? For a vacation? For clothing to be worn at a formal party?

d. Write some rules that will help you decide when to use credit.

e. Joy tells Linda, “This washing machine is a good buy–only $500. Now, if you don’t have the cash, I can arrange easy credit for you. Only $50 down and – $50 a month for 12 months. Just sign here.” Linda signs and pays $50. How much interest will she pay if the g contract calls for 12 monthly payments of $50 each?