[MUSIC] In this brief lecture segment, we'll be talking about loan contracts and consumer lines of credit. The learning objectives for this short lecture are, first, to differentiate between loan contracts and consumer lines of credit. And then, go over some of the characteristics of both of these two credit options. We'll also briefly talk about some of the factors that determine if individuals qualify for loan contracts or consumer lines of credit. So, let's first start by talking about loan contracts. When I think of a loan contract, I think of something where a lender or a bank, or some kind of lending institution, has provided a specific amount of money that is required to be used for a very specific purchase. So, loan contracts aren't just loans where you can use the money for anything. They typically outline something very specific in the loan contract itself. Some classic examples of loan contracts that many of us work with throughout our lives include the home montage loan that we might use to purchase the house that we live in. The loan that we use to finance or purchase the car that we're currently driving. Or for students exiting college, the loans that you start to pay back that helped to finance your education. Now, there are many different factors that are considered when you apply for a loan contract that go into determining whether or not you qualify for that borrowing. Personal financial information, and all of the information that's included in your credit report and your credit score, are very important pieces that are looked at by the lender who's making that decision. This is going to include factors such as your income, they typically want to look at whether or not you can verify your employment history. So, they want to be able to guarantee that you have a job, and the income level that you state on your loan application is accurate. As well as the information that exists about the other sources of debt that you currently have. For example, what type of payments you're required to make on those debt contracts. How you've repaid that debt over the past. And all of that information is going to be included in the credit report, and part of your credit score. Another somewhat unique characteristic of loan contracts, because they finance very specific purchases, is that the characteristics of what you are being purchased is another piece of information, or another factor that's going to go into that loan application decision. So, again, going back to the examples of a home loan or a car loan, a bank may require you to have the home inspected by someone who is certified, or have it appraised, so that they can assist whether the value that you've, the price that you've agreed to pay is consistent with the appraised value of the house. And they want to do that just to provide themselves with some protection in terms of the amount of money that they're agreeing to borrow you to make that purchase. Same thing with a car loan. If you're purchasing through a dealer, you may not even realize this is happening, but a lender who's financing a car loan may require your car to be inspected by certified mechanic just to make sure that everything is in order, again, to protect them in terms of the money that they're lending you to make that purchase. Moving on to consumer lines of credit. These are a little bit more, these are different from loan contracts, in that they provide more flexibility in terms of being able to be used to finance a broader range of personal expenses. So, rather, in contrast to a loan contract, where the money is being lended to you for something very specific, consumer lines of credit often offer a lot of flexibility in terms of how you can use that credit account to make various types of purchases. In most cases, consumer lines of credit are accounts that are often associated with a maximum credit line or spending limit so that you can only carry a certain maximum balance at any given time. But how you spend that money is very flexible. You can use it to finance your day to day spending, everything from groceries to your monthly bills, as well as some of those maybe irregular purchases if you need to buy a new TV or something like that. So, again, offers a lot more flexibility, and typically defined by a maximum amount that you can carry on that credit line at any given time. Classic examples of these are credit cards, that I'm sure many of you already have and use on a daily basis, as well as some of the retail credit accounts that you can get through many retailers. Now, the factors that are considered in qualifying for a consumer line of credit, there's a lot of similarities between those and the factors that are considered in loan contracts. But since we're not using consumer lines of credit, typically, to finance a specific purchase, what they mainly look is, again, your personal financial information, most of which is going to be contained in your credit report and credit score. So, again, these lines of credit do offer the flexibility to use the money for a wide range of purchases. But they're, so when they're considering your application for a line of credit, they're going to be looking at your personal financial information, how you've handled lines of credit or long contracts in the past, your repayment history, the amount of debt that you currently have, your income. All that personal financial information is really going to be critical in making that decision [MUSIC]
