Section 2 - Buying Goods and Services

Lesson 10 - Obtaining and Using Credit

Using Credit

Do you buy things on credit? Does your family? If you're a minor now, do you think you'll use credit extensively when you're an adult?

Whatever your view on credit, the fact is that nearly every adult Canadian uses it in one form or another. When people buy anything online, they're buying on credit. When they buy goods and services such as telephone, gas, and electricity and pay for them at the end of the month, they're using credit. Many Canadians have loans from institutions such as banks and credit unions-another form of credit. Some people buy automobiles, furniture, and appliances on credit, and many college and university students finance their education with student loans. All of these are types of credit. Credit is simply the advancing of money, goods, or services to people on the understanding that they'll pay for them at a later date.

Credit: money (or goods or services) advanced to another for repayment at a later date

Test Yourself:

1. Using credit to buy things has its advantages and disadvantages. Make a chart like the one that follows and complete it by listing as many of the advantages and disadvantages of using credit as you can. If you have a study partner, brainstorm for ideas.

Turn to the Suggested Answers at the end of this lesson and compare your answers with the ones given there.

Capital: measures your financial worth and is determined by whether you own things like a home, a car, and furniture or if you have savings, life insurance, investments, or stocks.

Capacity: is your ability to repay the borrowed amount. It's based on your employment and any debts you may have incurred.

Collateral: assets used to secure a loan; that is, something of value that the lender keeps if the loan isn't repaid

Defaulting on a loan

Remember Lesson 2, where contracts were explained? Well, if you agree to borrow money, you are making a contract with the lender; and if you default on your side of the bargain, the lender can take action against you. In other words, if you don't repay the money, along with any agreed-upon interest, after you'd contracted to, you should expect the lender to take steps to make you stick to the deal.

Here is a sample excerpt from a loan agreement explaining what obligations a borrower has if he or she defaults on the loan:

Where the loan is not repaid at maturity or a payment isn't made when due, the following charges may be imposed:

• interest on payments or repayments that are not made when due
• legal costs resulting from actions to collect payment or repayment in respect of the loan
• reasonable costs, including legal fees, incurred by or on behalf of the company

Default: failure to carry out an obligation you've contracted to do

Maturity: the date at which a total amount borrowed is due

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Test Yourself:

2. In each of the following situations, what would you do as a credit manager of the lending company if you had to follow the policy shown above?

1. Austin failed to make a car payment this month because he was laid off from his job for two weeks. He phoned the bank to say he would be unable to make the payment. What would you do? Why?
   
   
2. Sara has failed to make six 'payments on the new sofa set she bought through your company. No attempt has been made to contact you, and efforts to contact Sara at home have been unsuccessful. What would you do? Why?
   
   

Turn to the Suggested Answers at the end of this lesson and compare your answers with the ones given there.

If you default on a loan, you may end up in court, though that's certainly not the first or only step the lender is likely to take. The lender may turn your account over to a collection agency-a company licensed to collect unpaid bills.

Garnishee wages: to legally withhold all or part of a debtor's wages each wage period and pay them to the lender until the debit is paid

Declaring Personal Bankruptcy

Have you ever been unable to pay back someone who had lent you money? People in this situation can face a real financial crisis. If you ever do find yourself in a situation where you've used credit and can't repay the amount and the interest owing, what should you do?

Here are three steps consumers can take when they cannot repay their debts.

• They can communicate with their creditor (lender) and explain the situation. Perhaps they can work out new terms of repayment. Remember, it's in the lender's interests to have you repay the loan, so if revising the terms increases this likelihood, the lenders will probably go for it.

• If there are several loans involved, consumers can consider seeking help in consolidating them into one loan. For example, if you have loans on credit cards-which normally carry a high rate of interest-you may be able to borrow from another institution, such as a bank, at a lower rate and use this money to pay off the cards. Then you can more easily pay off the consolidated loan at its lower rate.

• Consumers who simply can't meet their financial responsibilities through other means can choose to declare bankruptcy.

Consolidate: to combine or merge two or more things, such as debts, into one

Bankruptcy: a legal situation in which a debtor turns most of his or her assets over to an official and is protected from further legal proceedings by creditors to recover the outstanding loan(s)

Bankruptcy: is a legal situation in which you assign all your assets, except some that are exempt by law, to a licensed "trustee in bankruptcy."' This process relieves you of most debts and protects you from legal proceedings against you by creditors.

Bankruptcy: is a legal process regulated by the Bankruptcy and Insolvency Act, a statute of the federal government. The purpose of this statute is to permit honest debtors to obtain discharge from their debts, subject to reasonable conditions.

Declaring personal bankruptcy is a serious business; the decision to do so isn't one to be made lightly. On the positive side, it does mean that your creditors will get something back of what they lent you and your own slate will be wiped clean so you can start over again. On the negative side, however, it means that you'll lose most of your assets and, for a while at least, you'll have a very poor credit rating.

This has been a very brief look at the business of getting and using credit. Remember that while credit can sometimes be a lifesaver, overusing it can cause tremendous problems down the road. Wise consumers use credit sensibly and sparing. If you do this, you'll avoid some of the financial problems that beset many people in our society, and you'll likely never have to resort to declaring personal bankruptcy.

Suggested Answers

1. Compare your chart to th e one that follows. You may have thought of other advantages or disadvantages.

2. Note that the document says "?the following charges may be imposed."' In other words, the credit manager has some discretion and room to maneuver depending on the clients' individual situations.
   1. Austin has missed only one payment, and he had a very good reason for doing so. He also took the trouble to phone the lending institution to explain things. In this case, the credit manager would probably allow Austin to postpone his payment for the month, though he'd likely be held responsible for the interest on the payment that was missed.
   2. Because of Sara's bad history of making payments and her irresponsible attitude, the credit manager would probably feel obliged to take legal action to collect what Sara owes, along with legal fees and other costs involved in collecting the debt.
      

   
   

Section 2 Conclusion

In this section you have examined laws that affect and protect consumers. You have looked into the legalities behind deposits and returns, you've learned about the essential forms and elements of legally binding contracts, and you've examined the rights of minors when making purchases. You have also looked at the protection offered consumers by warranties and guarantees, and you have studied some of the legalities involved in getting credit, defaulting on payments, and declaring bankruptcy.