1.3. Definition of terms “Credit policy” means a general framework approved by the board that spells out and guides the bank’s credit/financing strategic directions and credit /financing decisions. “Credit Scoring” means judging/evaluating the creditworthiness of a customer based on basic characteristics and past performance in credit and other relationships with Bank. “Digital Micro Credit” means micro loans that are requested, received and repaid all through mobile phones (or any other appropriate tools) via interaction with a computer system. “Digital MSL Policy” means a policy document that governs the management of digital micro saving and credit services. “Fixed Account” means a saving account locked for a certain period, a minimum of three months, based on the preference of the customers to fulfil their designated plan. “Lending officials” means any person involved in MSL business of customer acquisition, Credit Worthiness evaluation, Credit operation, Collection, monitoring and decision-making as well as write off and post write off follow up process. “Loan Pricing” means setting the interest rate, fees, commission, and others to be charged by the Bank on loans, advances, and guarantees extended to customers. “Retail and Micro Business Segment” means a category of customers having less investible asset, trading transaction and return from business. “Micro loan” means a small amount of loan availed to micro businesses and individuals for the purpose of supporting businesses and consumption. “Micro Saving” means a saving scheme designed for small deposits from micro businesses and low income individuals "Micro business customers" means customers having less investable asset, trading transaction and return from business. They represent the lower class of wholesale banking customer segments of the Bank. “President” means the highest-ranking executive officer who is primarily responsible for the day – to- day management affairs of the bank; “Target Account” means a saving account that allows the customers to set target for a minimum of three months and make deposits towards achieving their target “The Bank” means the Commercial Bank of Ethiopia. Agent: Shall mean a person engaged in a commercial/business activity and has been contracted by the bank to provide the services on its behalf. Financial Transaction: shall mean an event which involves money or payment, such as deposit money into a bank account, borrow money to customers. Merchant: shall mean an entity that contract with an acquirer to originate transactions and accepts cards for payment and displaying bank’s and the issuer's logo. Mobile Money System (MMS): shall mean performing banking activities which primarily consists of opening and maintaining mobile/regular accounts and accepting deposits; Furthermore, it includes performing fund transfer or cash in and cash out services using mobile devices. Personal Identification Number (PIN): shall mean a secret numeric passwor

1. Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1
Chapter 13
Personal
Financial
Management

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Chapter 13: Personal Financial
Management
13.1 The Time Value of Money
13.2 Consumer Credit
13.3 Truth in Lending
13.4 The Costs and Advantages of Home
Ownership
13.5 Financial Investments

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Section 13-2
Consumer Credit

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• Identify the different types of consumer credit.
• Determine the interest, payments, and cost for
installment loans.
• Determine account balances and finance
charges for revolving loans.
Installment Buying

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Borrowing to finance purchases and repaying
with periodic payments is called installment
buying. This section addresses two types of
installment credit.
Installment Buying

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Closed-end credit involves borrowing a set
amount up front and paying a series of equal
installments (payments) until the loan is paid
off. Furniture and appliances may be financed
through closed-end credit (sometimes called
fixed installment loans).
Closed-End Credit

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With revolving loans, or open-end credit,
there is no fixed number of installments – the
consumer continues paying until no balance is
owed. Examples include department store
charge accounts and charge cards such as
MasterCard and VISA.
Open-End Credit

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Installment loans set up under closed-end credit
often are based on add-on interest. This means
that if an amount P is borrowed, the annual
interest rate is to be r, and payments will extend
over t years, then the required interest comes
from the simple interest formula I = Prt. Find
the future value of a simple interest loan and
divide the payments equally (usually monthly)
over the t years.
Add-On Interest

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Zach buys $2800 worth of furniture. He pays $400
down and agrees to pay the balance at 6% add-on
interest for 2 years. Find
a) the total amount to be repaid and
b) the monthly payment.
Solution
Amount to be repaid = P(1 + rt)
= $2400(1 + (0.06)2)
= $2688
Example: Repaying an Installment
Loan

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Solution (continued)
b) Monthly payment = $2688/24
= $112
24 payments
Example: Repaying an Installment
Loan

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With a typical open-end credit account, a credit limit
is established initially and the consumer can make
any purchases during a month (up to the credit limit).
At the end of each billing period (normally once a
month), the customer receives an itemized billing, a
statement listing purchases and cash advances, the
total balance owed, the minimum payment required,
and perhaps other account information.
Open-End Credit

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Any charges beyond cash advanced and cash prices of
items purchased are called finance charges. Finance
charges may include interest, an annual fee, credit
insurance coverage, a time payment differential, or
carrying charges.
Open-End Credit

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Most open-end lenders use a method of calculating
finance charges called the average daily balance
method. It considers balances on all days of the
billing period and comes closer to charging card
holders for credit they actually utilize.
Finance Charge/Average Daily Balance
Method

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The activity on a credit card account for one billing
period is given on the next slide. If the previous
balance was $320.75, and the bank charges 1.4%
per month on the average daily balance, find the
average daily balance for the next billing (April 3)
and the finance charge for the April 3 billing.
Example: Average Daily Balance

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March 3 Billing date
March 12 Payment $250.00
March 17 Car repairs $422.85
March 20 Food $124.80
April 1 Clothes $64.32
Example: Average Daily Balance

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Solution
First we make a table of the running balance
Date Running Balance
March 3 $320.75
March 12 $320.75 – $250.00 = $70.75
March 17 $70.75 + $422.85 = $493.60
March 20 $493.60 + $124.80 = $618.40
April 1 $618.40 + $64.32 = $682.72
Example: Average Daily Balance

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Take the number of days of the balance times the
balance.
Date Balance Days Product
March 3 $320.75 9 $2886.75
March 12 $70.75 5 $353.75
March 17 $493.60 3 $1480.80
March 20 $618.40 12 $7420.80
April 1 $682.72 2 $1365.44
Solution (continued)
Example: Average Daily Balance

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Solution (continued)
Find the sum of the daily balances by adding the
last column = $13507.54.
Sum of daily balances
Average daily balance =
Days in billing period
$13507.54
31
$435.73.


Finance charge = (0.014)($435.73) = $6.10.
Example: Average Daily Balance