Assignment 3

docx

School

George Brown College Canada *

*We aren’t endorsed by this school

Course

FIN1011

Subject

Finance

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by BrigadierGrousePerson989

1. Review Tibor’s current financial information and briefly comment. (No Calculations required(4 marks). Assets and Liabilities: Tibor possesses significant assets, including a valuable condominium (400,000) and a reasonably sized emergency fund (6,000). However, he also carries substantial liabilities, primarily stemming from his mortgage (235,000) and credit card debt (23,000). Debt Management: Tibor's debt load is notable, especially considering the high- interest rates on his credit card balances (59,000). Prioritizing the repayment of high-interest debt should be a key focus to alleviate financial strain and reduce interest expenses. Cash Flow: Tibor earns a solid income as a graphic designer (69,512), but his expenses (71,230) exceed his net income, resulting in a deficit (1,718). It is crucial for Tibor to review and adjust his spending habits to achieve a balanced cash flow and avoid accumulating further debt. Budgeting and Expense Management: Tibor's budgeting and expense management practices could be refined to align more closely with his income and financial objectives. Implementing a detailed budget and tracking expenses (entertainment-6,400 / clothing-2,400 / vacation-8,000 / line of credit-12,960) diligently can help Tibor identify areas for cost-cutting and prioritize spending effectively. 2. Analyze a debt consolidation strategy using an instalment loan for Tibor. a. Briefly research two financial institutions that provide Installment loans and provide the interest rate, term and any additional features. (2 marks) Spring Financial Loan amount: $500 - $35,000 Rate: 10.8% - 46.99% Term: 6 - 60 months Min. Credit Score: 500 Turnaround time: Within 24 hours. Loans Canada Loan amount: $300 - $50,000 Rate: 6.99% - 46.96% Term: 3 - 60 months Min. Credit Score: 300 b. Based on your research, choose the best option for Tibor and explain why. (1 mark)

Loans Canada appears to be the best option for Tibor for the following reasons: - Lower interest rates: Loans Canada offers a lower minimum interest rate compared to Spring Financial. This could potentially result in significant savings over the life of the loan. - Higher Maximum Loan Amount: Loans Canada offers a higher maximum loan amount compared to Spring Financial. This could provide Tibor with more flexibility depending on his financial needs. - Lower Minimum Credit Score: Loans Canada has a lower minimum credit score requirement compared to Spring Financial. This could make it easier for Tibor to qualify for a loan. c. How much money will Tibor save with this debt consolidation loan. (3 marks) Current Debts: RBC Visa: $12,000 at 19% interest for 8.4 years Scotiabank Mastercard: $11,000 at 19.99% interest for 9.2 years Unsecured Line of Credit: $36,000 at 8% interest for 3.1 years The formula to calculate the total amount paid (principal + interest) on a loan is A = P + (P * R * T), where A is the total amount, P is the principal amount (the initial amount of money), R is the annual interest rate in decimal form, and T is the time in years. Using this formula, the total amount paid on each debt is: RBC Visa: $12,000 + ($12,000 * 0.19 * 8.4) = $31,008 Scotiabank Mastercard: $11,000 + ($11,000 * 0.1999 * 9.2) = $31,367.44 Unsecured Line of Credit: $36,000 + ($36,000 * 0.08 * 3.1) = $44,928 So, the total amount Tibor would pay on his current debts is $31,008 + $31,367.44 + $44,928 = $107,303.44. Debt Consolidation Loan: Total Loan: $59,000 at 6.99% interest for 5 years Using the same formula, the total amount paid on the new loan would be: Loans Canada: $59,000 + ($59,000 * 0.0699 * 5) = $79,605.50 So, by consolidating his debts with Loans Canada, Tibor could potentially save $107,303.44 - $79,605.50 = $27,697.94 in total payments. Now, let’s calculate the annual payments for each option: Current Debts: $107,303.44 / max(8.4, 9.2, 3.1) = $11,662.53 per year Debt Consolidation Loan: $79,605.50 / 5 = $15,921.10 per year d. List two benefits and two drawbacks for this debt consolidation. (2 marks)

Benefits: Easier Payments: Debt consolidation makes paying back money easier. Instead of many debts with different due dates, interest rates, and payment amounts, you only have one loan to worry about. This makes planning your monthly budget easier, and you’re less likely to forget a payment or pay late, which could lead to extra fees and hurt your credit score. Save on Interest: You could save money with debt consolidation. If the interest rate on your new loan is lower than the average interest rate on your old debts, you’ll pay less in interest over time. This could save you a lot of money, especially if you’re consolidating debts with high interest rates like credit cards Drawbacks: Possible Fees: Debt consolidation could save you money, but you also need to know about any fees with the new loan. Some lenders charge origination fees, which add to the cost of the loan. There might also be penalties for paying off your old debts early. Remember to consider these costs when figuring out if a debt consolidation loan will save you money. Longer Repayment Time: A debt consolidation loan might lower your monthly payment, but it could also make the repayment time longer. This means you could be in debt for a longer time. Even though the interest rate is lower, if you make payments for a lot more years, you could end up paying more in interest over time. 3. Analyze a debt consolidation strategy consolidating Tibor’ debt into his mortgage . a. Research a financial institution that provides a 5-year fixed mortgage and a variable rate mortgage and provide the interest rate, term and additional features. (2 marks) b. Based on your research, choose the best option for Tibor and explain why. (1 mark) Based on the current rates and the risk of getting into a Variable Mortgage, we would suggest Tibor to go into the fixed rate of 5.14%. c. Does Tibor have enough equity in his condo to do a mortgage consolidation? Why or why not? (2 mark) LTVR: 235,000/400,000= 58.75%. Tibor is able to do a mortgage consolidation, considering his LTVR is lower than 80% d. Tibor would like to be able to cover his cash flow deficit and to have an additional $6,000 to put towards savings and other goals. Can he leave

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his amortization the same or will he need to extend his amortization? If yes, by how many years. (7 marks) Calculation of new amortization period: I/Y= 5.14 P/Y= 12 C/Y=2 PV= 294,000 (Total Liabilities) PMT= -1450 FV=0 N= 463.75 38.65 years Calculation of new payments with the same amortization period: I/Y= 5.14 P/Y= 12 C/Y=2 PV= 294,000 (Total Liabilities) N= 240.96 20.08 years FV=0 PMT= -1949.74 Current Annual Debt Payments: $35,880.00 New Annual Debt Payments: $23,396.88 With this Debt Consolidation, Tibor will be able to cover his deficit of $1,718 and save $10,686. e. What three recommendations would you make to Tibor, including 2 benefits and drawbacks for each. (6 marks)

According to the simulations we did before, we came up with the following recommendations to Tibor: 1-) Getting into a Debt Consolidation in his mortgage: It will cut off the high rates he is actually paying for the other debts and will consolidate all his debts at a 5.14% rate and make him save $12,483.12 per year. On the other hand, the principal of his mortgage will increase by including the other debts. Additionally, the rates can decrease a lot in the next few years, however he is still gonna pay 5.14% rates on his fixed mortgage. 2-) We would recommend him to save this $10,686 into a Savings fund in order to have at least 3 to 6 months of expenses in liquid assets for any emergence. A drawback for this situation is that it will require Tibor’s discipline and also make lifestyle changes in order to keep his cash flow and savings under control and not getting into a new deficit. 3-) Finally, we would recommend Tribor to start investing in his retirement after completing his emergency fund. The profit on his cash flow can be used to invest in Registered Retirement Savings Plans and also in assets with the potential of making him feel comfortable when retired. It will also require discipline for him and sometimes make him refuse to go shopping or travelling a lot, but will guarantee a good financial situation for him today and in the future.