PERSONAL FINANCIAL PLANNING

FINANCIAL SERVICES FINANCIAL INSTITUTIONS

Post Office Monthly Income Scheme

Provides monthly income @ 8% p.a. On completion of six years, you get a 10 per cent bonus on the principal. Offers better liquidity as you have an exit option after one year from the investment date.

Post Office Recurring Deposit

Deposit a fixed amount regularly on a monthly basis

and get a tidy sum on maturity after the stipulated 5

years

The minimum monthly deposit has to be Rs. 10

The investor can close the account prematurely after

3 years. At closure, the investor is entitled to the

interest rate applicable to post office savings accounts.

National Savings Certificates

An assured return scheme Provides for tax rebates under section 80C. Pays interest at 8 per cent for a duration of 6years, which is relatively lower compared to other small saving schemes

Low liquidity and premature withdrawals can be done only under specific circumstances, such as the death of the

holder(s), forfeiture by the nominee, or under court's order.

KISAN VIKAS PATRA

Another fixed income scheme It doubles your money in eight years and seven months. No benefits under the Income Tax Act. In terms of liquidity, the scheme is better than the PPF and NSC. You can exit the scheme any time after two and a half years from the investment date, though you will forfeit the interest earned for the invested time period.

FINANCIAL SERVICES TYPES

Divided into 4 categories:
1. 2.

SAVINGS PAYMENT SERVICES

DDs, Cheques, Online Transaction

3.

BORROWINGS

Credit cards, Cash loans

4.

OTHER FINANCIAL SERVICES

Insurance protection, investment for future, Mutual Funds, Tax

assistance, etc.

FINANCIAL SERVICES TYPES

INSURANCE
A contract where one party agrees to pay for another party's financial
loss resulting from a specified event (for example, a collision, theft, or storm damage).

MUTUAL FUND
Enables investors to pool their money & place it under professional investment management. The portfolio manager trades the funds underlying asset.

TYPES OF FINANCIAL INSTITUTIONS

Central Bank

Formulation of rates Acceptance of deposits, lending CRISIL ,ICRA Protects investors interest, facilitate functioning of market intermediaries Offer protection against losses

Commercial banks

Credit Rating Agencies in India

SEBI

Insurance companies

CONSUMER CREDIT?
What is Consumer Credit? What are the uses of using credit? What is the trade off? Misuse of Credit Card?

What questions that you should ask to yourself before you make a major purchase?

THE FIVE Cs OF CREDIT

C = Capacity

C = Capital
C = Collateral C = Conditions C = Character
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Slide 2 - The Five Cs of Credit Lesson Reference: Credit, Activity 1 Overhead 1

WHEN TO USE CREDIT

Can you describe a situation when it is

a good time to use credit and when it is

NOT a good time to use credit?

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Slide 3 When to Use Credit Lesson Reference: Credit, Activity 1 Handout 2

Who uses Credit?

Consumer

T008.01.02

Credit Credit used by people for personal reasons. Commercial Credit Credit used by businesses.
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Types of Credit
Charge Accounts most common type of shortterm or medium-term credit.
Regular
Require

Charge Accounts Charge Accounts

that you pay for purchases in full within a certain period of time. you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month.

Revolving
Allows

Budget

Charge Accounts

Allows

you to pay for costly items in equal payments spread out over a period of time.

Credit Cards
Single-Purpose

Can only be used to buy goods or services at the business that issued the card. Examples: JC Penney, Sears

Multipurpose
Similar to a revolving charge account. May be used at several locations. Examples: Visa and Master Card

Travel and Entertainment

Similar to regular charge accounts. Must be paid in full each month. Example: American Express

Banks and Other Financial Institutions

Single Payment Loan

Debtor pays off loan in one payment. Promissory Note

Written promise to repay with interest.

Installment Loan

Repaid in regular payments.

Installment Loans
Types:

Student, mortgage, automobile, etc. Secured loans are backed by collateral (help guarantee the repayment of a loan). Closed-end credit is used for a specific purpose and involves a definite amount of money. Open-end credit gives you a certain limit on the amount of money you can borrow. Responsible for the repayment of a loan if the original party does not pay.

Secured vs. Unsecured

Closed vs. Open Ended

Cosigner

Consumer Finance Companies

Specialize in loans to people with poor credit ratings. The cost of credit is higher than other institutions.

Bonds
Bonds written promise to repay a loan with

interest on a specific date. The buyer of the bond is considered the creditor.

Corporate Bonds

Usually used to finance buildings and equipment.

State and local governments use these to finance projects. Sold by federal government.

Municipal Bonds

Savings Bonds

T008.01.11

Other Sources of Credit for Businesses

Small Business Administration

Offers a number of financial, technical, and management programs to help businesses.

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T008.01.12

Other Sources of Credit for Consumers

Life Insurance Plans

Cash Value Insurance

Provides both savings and death benefits.

Retirement Plans

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Why Use Credit?

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Convenience

Shop without carrying cash.

Allows you to have possession on the goods or services now. Helps in case of a serious situation.

Immediate Possession

Emergencies

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Advantages
Immediate Possession Convenience

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Buy now and pay later.

Emergencies Saving Money

Buy an item while it is on sale.

Credit Rating

Establish a favorable credit rating.

Buying goods will help the economy expand.
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Growth of the Economy

T008-03.03

Disadvantages
Overbuying Most common hazard.
Careless Buying Comparison shopping may not be a priority Encourages impulse buying Higher Prices Some stores offer discounts for cash sales.
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T008-03.04

Disadvantages continued
Overuse of Credit Too much is owed unable to pay back.

Credit Fees

Interest paid on balance

Habit Forming
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Results of Overuse

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Garnishment of Wages

Money deducted from wages for money owed.

Loss of property because of failure to repay loan.

Repossession

Bankruptcy

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Process of Obtaining Credit

1.
2. 3. 4. 5.

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6.

Credit Application Documentation Processing Underwriting Closing Funding

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Credit Application

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Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan. Provide the following information:

Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

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T008-04.04

Documentation

Creditor will collect and verify necessary documentation for the extension of credit.

Examples: Bank statements, credit card statements, past W-2s, etc.

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T008-04.05

Processing
Building of loan file. Evaluating credit worthiness.

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The Cs of Credit Worthiness Capacity

Credit Worthiness Terms (Processing)

Your ability to pay (income)

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Character

Earned by paying bills on time and being a trustworthy, reliable, stable person. References people you have borrowed from in the past. Security to help guarantee that the creditor will be repaid.

Collateral

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Credit Worthiness Terms (Processing) continued

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Credit History

Indicates the amount of debt you have and your payment history.
How much you have beyond what you owe. Maximum amount you can borrow. Responsible for a loan if you, the original debtor, do not pay.
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Capital

Credit Limit

Cosigner

Underwriting
Reviewing loan for soundness. Consumer Reporting Agencies

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Company that compiles and keeps records on consumer payment habits. Used to evaluate creditworthiness. Examples: Equifax, Experian, and TransUnion.

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T008-04.09

Closing
Representative explains terms of credit. Debtor signs appropriate forms.

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T008-04.10

Funding

Creditor will issue credit/funds to the debtor.

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