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EDITOR: Josie Downey

The Bank Customers Publication

July l 981
Volume I No. 7

Repaying A Loan Early May Be More
Costly Than You Think
Many people borrow from a bank or
other lenders and arrange to repay the
loan with interest in a number of
monthly installments. After several pay­
ments. they may decide to repay the
entire loan and are disappointed to learn
that the balance due is higher than they
Some consumers assume that the inter­
est on the amount of money they borrow
is divided evenly over the number of
{ 1yments they agree to make. For ex_mple. some consumers believe that if
they pay off t�e loan after 10 months
instead of 30 months as originally
agreed, they would owe only one
third interest. Creditors. however, do
not compute interest on loans by
dividing the interest e\'enly over the
number of payments.
When a consumer decides to pay off a
loan early. there are two common
methods creditors use to determine the
rebate - the portion of the interest that
will reduce the balance due in case of
early repayment. The two formulas are
the rule of 78's and the actuarial
The rule of 78's is recognized as the
most simple method for allocating earn­
ings and computing rebates for install­
ment loans. Most states permit use of
the rule to calculate rebates.
For example, if a $1.000 loan is to be
repaid in 12 equal monthly payments at
an 18 percent annual percentage rate,
the finance charge (interest) amounts to
$100.04. The total to be paid is $1, I 00.04,
and the monthly payments are $91.67

($1, I 00.04 divided by 12). If the consum­
er prepays the loan at the end of the
sixth month, $550.02 or half of the loan
might appear to be due. The remaining
half, however. includes the unearned
finance charge (interest) - unearned
because the lender has received his
money back at the end of the sixth month
rather than at the end of the twelfth
Under the rule of 78's the custor:ner
would owe $523.09. The money the con­
sumer would save would be $26.93
($550.02 minus $523.09) - the finance
charge (interest) unearned by the credi­
tor for the remaining six months. This
would be the .. refund" or ..rebate."
If the creditor is using the rule of 78's.
the customer would not receive as large
a rebate as she or he would receive under
the actuarial method.
The actuarial method is the second
common method to determine rebates.
Under this method. using the previous
example. the customer would need to
pay $522.38 or 71 cents less than under
the rule of 78's. While the difference is
small in this example, the difference
between the rule of 78's and the actuarial
method can be substantial in loans of
longer maturity.
Under the actuarial method, each
monthly installment is allocated to the
payment of interest and principal on the
basis of how much money remains as
borrowed. In other words. interest is
computed on the outstanding balance.
As the principal reduces, the part of
each installment required for interest

decreases. For example, a $1,200 loan,
including $1·,I00 principal and $100 inter­
est is repayabie in 12 monthly install­
ments of $100 each. Obviously, the out­
standing total debt is 12 times greater in
the first month ($1,200) than in the final
month ($IO0). Since the debtor is using
more of the creditor's money in the first
few months than the final months, the
creditor charges more interest in the first
few months and less interest in the final
Keep in mind that paying off a loan in 6
months instead of 12 will not produce a
savings of one half of the interest. You
may, however, be entitled to a rebate of
certain other charges when you prepay a
loan, such as a portion of the premium
for credit insurance.
The currenL Truth in Lending law
requires that creditors disclose the
method used to calculate any prepay­
ment rebate. Look for the prepayment
disclosure statement before you sign a
loan agreement. Ask for an explanation
if you don't understand. Under the
revised Truth in Lending law, you will
have to read the contract to find out the
method of rebate of interest or finance
charges if the loan is prepaid ahead of

Federal Deposit Insurance Corporation
Washington. D.C. 20429

-Thomas C. 0 'Nell
FDIC Headquarters
Washington, D. C.

Cosigning A Loan May Be
Expensive For The Cosignor

Consumers should be aware of the
risks involved in cosigning a loan. Many
people believe that when they cosign a
loan for a relative or close friend, they
will not have to pay. They sign the loan
agreement believing that only the bor­
rower is liable for the debt; however, in
some instances the cosignor ends up
paying. According to a survey submit­
ted by the National Consumer Finance
Association to the Federal Trade Com­
mission, almost half of the people who
cosigned loans are asked to pay them.
In many states, if the borrower can't
repay the loan, the lender can hold the
cosignor personally responsible for the
debt. The debt may include late charges
and fees if the borrower is late in making
payments. If the lender cannot contact
the borrower, the lender can sue the
cosignor instead of the borrower. If the
lender wins, not only is the cosignor lia­
ble for the court costs and attorneys'
fees, but may lose his wages or property
to the lender as well.
When you are .asked to cosign a loan,
remember you are taking a risk a profes­
sional lender won't take. The lender pro­
tects himself by requiring the borrower
to have a cosignor. However, there may
be times when you may want to cosign.
If you should decide to cosign, keep the
following tips i_n mind.


Be sure you can afford to pay the
loan before you cosign. If you are
asked to pay and can't, you may
be sued or your credit rating may be

• Ask the lender if you can be liable
for a certain amount of the loan.
Keep in mind that he isn't obli­
gated to do this. Agree to pay the
principal balance on the loan,
but try not to be responsible for
late charges, court costs, and at­
torneys• fees. Ask the lender to
write a statement in the contract
saying that you will only be re­
sponsible for the principal bal­
ance on the loan in the event of

• Ask the lender to agree in writ­
ing, to notify you if the borrower
misses a payment. Notification
should come before a late charge
is added and always before the
loan is "accelerated" (the total
a m ount of the loan is de­
manded). You may have time to
make the late payments without
having to pay the total amount of
the loan.
• It is important that you get
copies of all the papers signed by
the borrower: the loan contract,
the Truth in Lending Disclosure
Statement, and any warranties
for products purchased if it's a
credit sale. These may be needed
in case there is a dispute later
between the borrower and the
• Don't be pressured into cosign­
ing a loan for a relative or close
friend. Many people sign under
pressure and are faced with pay­
ing off the loan. Consider care­
fully the consequences of cosign­
ing a loan. After you sign, it's too
late to withdraw your signature.


Josie Downey

El Cofirmar Un
Prestamo Puede Ser
Costoso Para
El Cofirmante
Los consumidores deben estar infor­
mados del riesgo envuelto al cofirmar
un prestamo. Muchas personas creen
que al ellos cofirmar un prestamo para
un familiar o un amigo no tendran que
pagarlo. Ellos firman el contrato de

prestamo confiando que s61o el presta­
tario es responsable por la deuda. Sin
embargo, en algunos casos el cofir­
mante termina pagando dicha deuda.
De acuerdo con un estudio presentado
a la Comisi6n Federal de Comercio
("Federal Trade Commission") por la
Asociaci6n Nacional de Finanzas def
Consumidor ("National Consumer Fi­
nance Association"), casi la mitad de
las personas que cofirman prestamos
se le exige pagarlos.
En muchos de los estados, si el presta­
tario no puede repagar el prestamo el
prestamista esta en posici6n de hacer
al cofirmante personalmente respon­
sable por la deuda. La deuda puede
incluir cargos por demora si el prestata­
rio se demora en sus pagos. Si el pres­
tamista no puede comunicarse con I
prestatario, el prestamista puede prl!
sentar pleito en contra del cofirmante
en vez del prestatario. Si el prestamista
gana el pleito, el cofirmante no s61o es
responsable de asumir los cargos de
corte y los honorarios de abogado, pero
tambien puede perder. su sueldo o
propiedad a favor del prestamista.
Cuando a usted le pidan cofirmar un
prestamo recuerde que esta asumien­
do un riesgo que el prestamista pro­
fesional no asume. El prestamista se
protege a sr mismo, al exigir que el
prestatario tenga un cofirmante. Sin
embargo, puede que haya ocaciones
que usted desee cofirmar. Mantenga
los siguientes consejos presentes si
usted decide cofirmar.
Aseg�rese• de tener recursos
para pagar el prestamo antes de
cofirmarlo. Si a usted le exigen
pagar y no puede, pueden pre­
sentar pleito en su contra o su·
evaluaci6n de credito puede ser
• Solicite que el prestamista lo
haga responsable por cierta
cantidad del prestamo. Recuerdt
que el no esta bajo la obligaci6n
de hacer esto. Llegue a un acuerdo
para pagar el balance principal


(cont. pag. 3)

El Cofirmante
(cont. de pag. 2)

del prestamo, pero trate de no
hacerse responsable por los
cargos por demora, cargos de la
corte y honorarios de abogado.
Soliciteque el prestamista escriba
una clausula en el contrato
senalando que en caso de in­
cumplimiento usted s61o sera
responsable por el balance prin­
cipal del prestamo.
• Llegue a un acuerdo en escrito
con el prestamista para ser notifi­
cado si el prestatario no cumple
con sus pagos. La notificaci6n
debe llegarle antes de ar\adir un
cargo por demora y siempre
antes que el pago total del
prestamo sea adelantado ("ac­
celerated" - le exigen la canti­
dad total del prestamo).
• Es importante que usted con. siga copias de todos los do­
cumentos firmados por el presta­
tario: el contrato del prestamo,
la declaraci6n conforme a la Ley
de Veracidad en Actividades
Prestatarias, y cualquier garan­
tfa de los productosque ha com­
p r a do s i e s u n a v e n t a a
credito. Estos documentos pue­
den ser necesarios si mastarde hay
una disputa entre el prestatario
y el vendedor.
• No deje que un familiar o un
amigo cercano ejerzan presi6n
para que usted cofirme un pres­
tamo. Muchas personasquecofir­
man bajo presi6n se cofrontan con
que tienen que pagar el pres­
tamo. Considere cuidadosamente
las consecuencias de cofirmar
un prestamo. Recuerdeque des­
pues que usted firme es muy
t a r d e p a r a r e t r a c t a r su
Madeleine Rivers

Older Consumers Have
Equal Access To Credit

Problems involving credit can be particularly serious for the elderly. The use
of credit cards and installment loans for
buying goods is relatively new and many
older buyers are being confronted for
the first time with the concept that buy­
ing on credit is both acceptable and
necessary. For many older Americans,
the idea of buying goods and services on
credit is a foreign concept, since many of
them have paid most of their obligations
in cash. Many older people have neither
credit ratings nor experience with buy­
ing on credit.
In spite of their inexperience with
credit, more and more elderly persons
have begun using credit. Several laws
have been enacted to protect consumers'
rights. A number of these laws directly
affect the elderly. The Equal Credit
Opportunity Act (ECOA) prohibits cred­
itors from discriminating against the
elderly in any aspect of a credit transac­
tion. Despite the Act's prohibition of
age discrimination, many of the elderly
may continue to be treated unfairly in
the credit market. The following are
some of the problems older buyers en­
Many elderly citizens pledge their
homes as security, and are sometimes
coerced into purchasing major un­
needed home improvements, such as a
complete roof when the existing roof
could be repaired. Elderly consumers
need to know that when they pledge
their home, they are provided under the
Truth in Lending Act with a three-day
right of rescission on the contract. They
also need to understand that if their con­
tract is sold, and they have a claim
against the contractor, they can often
assert that same claim against the holder
of the note.
Creditors use various criteria to deter­
mine whether an applicant is credit­
worthy. They want to ensure that the
applicant is both willing and able to
repay the debt. However, evaluating
elderly applicants by the same criteria
applied to younger applicants may some­
times inequitably limit access to credit
by elderly consumers. The Equal Credit
Opportunity Act states that refusing to
grant credit on the basis of age is against
the law.

While it is permissible for a creditor to
consider life expectancy tables in deter­
mining the likelihood of an applicant's
repaying a loan, some creditors appear
to use life expectancy factors as a means
to limit the amount of credit or refuse to
grant it to the elderly. "Creditors may
deny loans to older applicants because
of fears that death of the applicant will
prevent repayment of the loan or be­
cause a short life expectancy means the
creditor will get less repeat business
from an elderly applicant. Creditors
may also terminate or fail to renew a
loan because of decreased life expec­
tancy, or offer such onerous terms that
an applicant cannot possibly repay the
loan on the terms offered. The Equal
Credit Opportunity Act prevents the age
factor from being used against the
elderly when they need credit.
The elderly now have consumer pro­
tection credit laws to protect them. The
Fair Credit Reporting Act (FCRA), the
Electronic Fund Transfer Act (EFTA),
the Truth in Lending Act (TILA), the
Fair Credit Billing Act (FCBA) and the
Fair Debt Collection Practices Act
(FDCPA). Pamphlets on these laws are
available at FDIC. Call FDI C's consum­
er toll free hotline 800-424-5488 to order
the above pamphlets or write to FDIC,
Office of Consumer and Compliance
Programs, 550 17th St., NW, Washing­
ton, D. C. 20429.

If you wish to be placed on the FDIC
Consumer Newsletter mailing list
please fill out the form below and mail
Josie Downey, Editor
Federal Deposit Insurance Corp.
SSO 17th St., N.W.
Room S1340
Washington, D.C. 20429


_______ Apt __

City ------------State _____ Zip _____

Questions From Bank Customers

- 800-424-5488-

Q: In your April issue of the consumer newsletter, I read
that the bank may enforce a penalty if it so chooses f'(
early withdrawal of a time deposit upon the death of tth..
owner or if the owner of a time deposit was declared
incompetent by a court. I believe you are in error.
A:.,.. You are correct. According to Section 329.4 of the
FDIC regulations, not only must a bank grant a request
for early withdrawal of a time deposit upon death of the
owner or if the owner has been declared incompetent by
a court, but the bank must also honor the request
without a penalty. The editor apologizes for the error.
Q: Can a bank require a minimum balance on a checking
account to qualify for free checking and levy service
charge� if the account balance falls below the minimum?
A: Yes, as long as the service charges are uniformly applied
to all customers that have the free checking service.
Q: If a person has an interest in more than one joint
account. what is the extent of his or her insurance
coverage by FDIC?
A: All joint accounts owned by the same combination of
individuals are first added together and the total is
insurable to $ 100 .000. Then the person's insurable
interests in each joint account owned by different
combinations of individuals are added together and the
tota_l is insured up to the $l00.000 maximum.

The Four C's Of Credit
When you apply for a loan, you may
wonder just what factors the loan officer
takes into consideration in approving or
denying your application. Many banks
use different methods in evaluating appli­
cations. The criteria most banks use fit
generally into four categories: charac­
ter, capacity, capital. and collateral.
These are commonly referred to as the
four C's of credit.
The following definitions will help you
to understand what to expect from some

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CHARACTER refers to your repu­
tation, credit rating. business record,
willingness and determination to pay
your financial obligations.
CAP ACITY relates to your ability to
make payments on the loan. This
would be influenced by your earnings
record. training. education, and skills
in addition to other obligations you
may have.
CAPITAL is the analysis of your
overall financial status, including the
value of your assets and the amount

of your obligations.
COLLATERAL relates to an evalua­
tion of the property or .asset being
financed or promised to secure the
loan. This "C" looks at the value.
type, location. and other attributes of
that property.
When filling out a loan application, it
would be to your benefit to keep the four
"C's" in mind although some creditors
will place more emphasis on one than
Simona Frank
FDIC Regional Office
Madison, Wisconsin

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