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MCS 3040 (220)
Chapter 25

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University of Guelph
Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 26  Credit arrangements outside normal business activities tend to be more formal and provide more security to the lender  Lenders will consider 2 major criteria in evaluating the loan application 1. Financial Health of borrower: this evaluation will determine whether the lender grants the loan and if so on what terms (eg. interest rate will reflect the risk) 2. Security of borrower can provide repayment  A lender usually wants collateral to bay up promise to pay  A lender will carefully review borrowers assets in terms of current value  If the creditor approves the loan, the resulting agreement is a credit agreement (contract)  The lender agrees to lend money based on the terms of the agreement which will require borrower to repay the money on a specified schedule and provide security in event of default Default: Failure to may payments on the loan  If a debtor defaults, creditor can take action to have assets seized and sold to satisfy unpaid debts  As extra security a lender may also seek assurance from a person other than the one borrowing Collateral: Security of a borrowers promise to repay a loan Regulation of Credit Consumer Debt: A loan to an individual for a non-commercial purpose  Government intervention in the system of credit is mainly through consumer protection legislation, which applied to transaction that lead to consumer debt where the borrower is a consumer rather than a business Regulations … 1. Are specific rules a business must follow when it extends credit to consumers (otherwise it risks penalties) 2. These rules function as a guide that businesses can use to protect themselves and to ensure good consumer relations Aspects of consumer credit that are subject to regulation… 1. Credit Bureaus: An agency that compiles credit info on borrowers  Lenders use this info to evaluate requests for loans  There are licensing systems to ensure the respectability of credit bureaus ad regulations to ensure the accuracy of the info compiled  Consumers have access to their files to ensure accuracy 2. Lenders are not allowed to make misleading statements in the application & negotiation process 3. In order to protect borrowers from those who would provide credit at super high rates, the criminal code prohibits lending at a rate of interest above 60%/year 4. Legislation requires disclosure of the true cost of lending in terms of (A) the amount borrowed, the amount of interest, any other charges such as registration or insurance, the total balance payable & (2) The annual rate of interest (as a %) and the period over which the rate applies 5. The remedies a borrower can seek where a lender has failed to observe the regulations including filing a complaint against the lender (which can lead to fines, license suspension etc), or sometimes claiming damages 6. Collection agencies provide a service to lenders who have a hard time recovering loans. These agencies are subject to a licensing scheme and cant harass, threaten or exert undue pressure on defaulting borrowers New regulations that apply to credit cards issued by federally regulated institutions require…  A summary box be shown on applications and contracts that clearly states interest rates & fees  Disclosure of the time to pay off balance by making only the min. payment  Notice of any interest rate increases  Mandatory 21 day interest-free grace period for new purchases  Consumer’s prior consent for increased credit limits  Federal government now allows the provinces to regulate payday loans  These are loans granted for a short period of time by a store
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