Module 2: Business Ownership, Cash Mgmt, & Use of Debt

Question 1

Are taxes a fixed outflow or variable outflow?

Answer 1

variable outflow

Question 2

How much of disposable income should go to savings?

Answer 2

10%

Question 3

What does the basic liquidity ratio show?

Answer 3

the # of months a household can continue to meet its expenses from existing cash/cash equivalents

Question 4

How much of liquid assets should you have in an emergency fund?

Answer 4

3 to 6 months…6 months if only one spouse is bringing in income

Question 5

What does the savings ratio show?

Answer 5

indicator of what % of gross income a family/individual sets aside for future consumption. 10% or more is considered healthy.

Question 6

What does front-end ratio show?

Answer 6

Indicates % of income that goes toward housing costs . Includes PITI, and homeowner’s association dues.
should not exceed 28% of gross monthly income.

Question 7

What does the back-end ratio show?

Answer 7

Identifies the % of income that goes toward paying all recurring debt payments (including those covered by front-end ratio) and includes credit cards, car loans, student loans, child support, alimony.
Max measure - no greater than 36% of gross monthly income.

Question 8

What does the consumer Debt-to-Income ratio show?

Answer 8

compares annual payment to service debt. uses NET INCOME. a ratio of 20% or less is healthy.

Question 9

Why does the debt-to-income calculations use gross income?

Answer 9

Because of the tax-favored status afforded mortgage interest payments.

Question 10

What are the six major areas to evaluate for a client?

Answer 10

Emergency fund, level of debt, level of savings, diversification of assets, preparation for retirement, tax issues.

Question 11

What are five areas most lenders consider in evaluating a potential borrower? (five C’s)

Answer 11

character (honesty & reliability - how previous financial responsibilities are handled.
capital (net worth)
capacity ( income available to pay off debt)
conditions (general economic environment - less may be available to lend)

Question 12

What is risk based pricing in regard to credit?

Answer 12

Risk based pricing is when the borrower is charged a higher interest rate due to credit report problems.

Question 13

Two most important pieces of info when qualifying for credit?

Answer 13

How well person pays off debts and the amount owed (proportion of credit used to credit available).

Question 14

What act allows consumers one free credit report per year?

Answer 14

The Fair and Accurate Credit Transactions Act (FACT)

Question 15

What are the two types of credit?

Answer 15

installment (closed-end) and revolving (open-end)

Question 16

What is installment credit?

Answer 16

It is closed end credit - installment loans- and are for a longer period of time. Mortgages, car loans, appliances, furniture

Question 17

What is a chattel mortgage?

Answer 17

a mortage on personal property such as tools or machines

Question 18

What is FNMA?

Answer 18

Federal National Mortgage Association (Fannie Mae)
not gov’t guaranteed but federally chartered (government sponsored) and mortgages are implicitly backed by taxpayers
Offers lower rates to lower income borrowers

Question 19

What is FHLMC?

Answer 19

Federal Home loan Mortgage Corporation (Freddie Mac) same as Fannie Mae loans not government guaranteed

Question 20

What is a bridge loan?

Answer 20

allows borrower to buy a new home before old one is sold. Either through two mortgages (home equity loan) or HELOC

Question 21

What is an affinity card?

Answer 21

Credit card that is with a particular organization (i.e. Delta for airline miles)

Question 22

What act is a credit card holder protected by?

Answer 22

Fair Credit Billing Act

Question 23

What act is a debit card hold protected by?

Answer 23

Electronic Funds Transfer Act

Question 24

What is a secured credit card?

Answer 24

person with poor or no credit puts a deposit in a bank account and the credit limit is equal to the deposit in account. Usually higher interest rates.

Question 25

What is a pell grant?

Answer 25

A Pell Grant is a subsidy the U.S. federal government provides for students who need it to pay for college. Federal Pell Grants are limited to students with financial need, who have not earned their first bachelor’s degree, or who are enrolled in certain post-baccalaureate programs, through participating institutions

Question 26

What is a Federal Supplemental Educational Opportunity Grant?

Answer 26

The Federal Supplemental Educational Opportunity Grant, more commonly known by its acronym SEOG, is a federal assistance grant reserved for college students with the greatest need for financial aid to attend school.

Question 27

What is the similarities and differences between direct subsidized and unsubsidized loans?

Answer 27

both are federal loans
subsidized are need-based only and only for undergraduate studies and may have lower rates than unsubsidized.
Subsidized loans do not accumulate any interest while student is in school at least 1/2 time or during deferrment periods.
Anyone can get Unsubsidized loans and can be used for graduate studies

Question 28

What are PLUS loans?

Answer 28

Parent Loans to Undergraduate Students
for undergrad, parents are the borrowers
Grad students can get loans thru PLUS but they are the borrowers.

Question 29

What are some pros and cons to leasing a car?

Answer 29

Tends to be better for businesses, monthly payments are lower
Cons- credit requirements are stricter and it may be difficult to end lease before end of contractual term.

Question 30

What are the two types of leases?

Answer 30

1. Closed End - At the end of the lease term, leasing agent takes back property. No additional charges
2. Open End - lessee may need to make up difference between value and the amount for which it is sold by leasing agent.

Question 31

What are advantages of home ownership?

Answer 31

More privacy
monthly housing costs tend to remain more stable (inflation has less of a negative effect)
Interest paid on mortgage and property taxes may be taken as itemized deductions on tax return.
may be an appreciating asset
creditors look more favorably on home owners

Question 32

What does the Consumer Credit Protection Act do?

Answer 32

AKA Truth in Lending Act
requires full disclosure of costs of borrowing (APR and dollar amount of finance charges)
Prohibits companies from sending unrequested cards
Limits liability of unauthorized user to $50 per card
every card must contain some form of ID (picture or signature)

Question 33

What does the Consumer Credit Reporting Reform Act do?

Answer 33

regulates use of credit reports
gives consumer access to credit file and allows consumer to report any errors
law requires person be informed as to why they were denied credit within 30 days

Question 34

What does Fair Credit Billing Act do?

Answer 34

established procedures to follow when revolving account billing errors occur. allows consumer to withhold payment for faulty or defective goods/services when purchased with a credit card. Complaint must be made within 60 days after date of first bill containing error. Lender has 30 days to acknowledge and has 90 days to fix or prove it was correct.

Question 35

What does the Tax Cuts and Jobs Act do?

Answer 35

gives sole proprietors and owners of pass-thru businesses a deduction of up to 20% to bring tax rate lower for qualified business income.

Question 36

What is a sole proprietorship?

Answer 36

business owned by one individual
no formal organizational docs or annual registrations required
all profits/losses flow thru personal tax return using Schedule C
Personally liable - can be sued personally for any products/services
must profit 3 out of last 5 years NOT to be considered a filer’s hobby