Credit Analysis Exercise

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Assignment
 #2 Personal
 Finance
 p.
 183 Combined
  Yearly
  Combined Income
  Estimate

Category

Vicki

Tim

Assets Checking
 Account Car 401K Income Gross
 Annual
 Salary After-­‐Tax
 Monthly
 Salary (Monthly
 Take
 Home
 Pay) Liabilities Student
 Loan Credit
 Card
 Balance Monthly
 Expenses Rent Food Student
 Loan Credit
 card
 payments Entertainment Wedding
 Expenses Gas
 /
 Repairs Retirement
 Savings 401k
 

10500 2500 25000

400 15000 8000

50000 2917

48000 2800

98000 5717

9000 10000

750 250

450 350 300

1200 250 300 500 350

500
plus
 50%
 match
 on
 7% 10%
 gross
 salary

400
plus
 50%
 on
 8%

1.
 Classify
 Vikki
 and
 Tim's
 credit
 as
 open-­‐end
 or
 closed-­‐end: The
 credit-­‐card
 debt
 is
 open-­‐ended
  and
 the
 student
 loan
 is
 closed-­‐ended. 2.
 Analyze
 the
 debt
 payments-­‐to-­‐income
 ratios
 for
 Vikki
 and
 for
 Tim. Page
 1


 Debt
 Payments
 to
 Income
 Ratio Vikki's
 Debt
 Payment-­‐to
 Income
 Ratio
 =
 Monthly
 Debt
 Payment
 /
 Montly
 Take
 Home
 Pay =
 250
 /
 2917
  = 0.08570449 Tim's
 Debt
 Payment-­‐to-­‐Income
 Ratio =
 300
 /
 2800 = 0.10714286 3.
 Analyze
 the
 5
 C's
 of
 Credit
 for
 Vikki
 and
 Tim.
  Character:
 Will
 they
 repay
 the
 loan?
  So
 far
 as
 we
 know,
 neither
 has
 any
 evidence
 of
 late
 payments,
 so
 yes,
 they probably
 will.
 Also,
 Tim
 became
 nervous
 when
 he
 realized
 he
 had
 more
 than
  debt
 than
 he
 expected,
 so
 that's
 a
 good
 sign
 (rather
 than
 being
 cavalier
 about
 it). Capacity:
 Can
 you
 repay
 the
 loan?
  They
 both
 make
 good
 salaries,
 so
 I'd
 say
 yes.
 But
 they
 should
 pay
 off
 those
 credit
 cards
 before applying
 for
 a
 home
 loan.
 Since
 they're
 not
 going
 to
 be
 applying
 for
 another 2
 or
 3
 years,
 they
 have
 plenty
 of
 time
 to
 pay
 that
 off.
 They
 should
 also
 have
 a
 frugal
 wedding like
 so
 many
 people
 are
 doing
 these
 days
 and
 not
 get
 into
 debt
 over
 that.
  Their
 combined
 debt-­‐to-­‐credit
 ratio
 isn't
 that
 bad.
 If
 they
 can
 come
 up
 with
 a
 solid downpayment,
 they
 should
 be
 able
 to
 afford
 at
 least
 $1200
 /
 month
 for
 their
 mortgage payment,
 since
 that's
 what
 they
 pay
 in
 combined
 rent.
  Capital:
 What
 are
 your
 assets
 and
 net
 worth?
  They
 make
 good
 salaries,
 have
 401k's
 (though
 they
 shouldn't
 touch
 those
 in
 order
 to
 buy
  their
 house
 of
 course),
 and
 Vikki
 has
 $10,500
 in
 her
 checking
 account
 (wha?
 Put
 that
 in
 an
 interest-­‐bearing
 financial
 product,
 girl!
 And
 a
 $9000
 student
 loan
 is
 not
 bad.
 Again,
 they
 have
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