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Personal Finances > The Costs of Credit Alternatives > Flashcards

The Costs of Credit Alternatives Flashcards

1
Q

True or False: Parents or family members are often the source of the least expensive loans

A

True. They may charge you only the interest they would have earned had they not made the loan.

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1
Q

What two situations should you avoid credit?

A

Using it for a product that you don’t really need or want and using it for something you can afford to pay in cash.

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2
Q

What is the typical interest rate of loans that come from financial assets held by a lending institution? What is the trade-off of them?

A

5 - 7%. Your assets are tied up until you have repaid the loan.

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3
Q

What places can you obtain a medium priced loan?

A

Commercial banks, federal savings banks, and credit unions.

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4
Q

What are the advantages of borrowing from credit unions?

A
  • They provide free credit life insurance
  • They are sympathetic to borrowers with payment problems
  • They provide personalized service
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5
Q

What places offer expensive loans?

A

Finance companies, retailers, and banks through credit cards.

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6
Q

What should you do before you sign a loan contract with a finance company?

A
  • Explore other financing options
  • Do your homework (contact other lenders, compare interest rates, look at terms and cost of loans)
  • Know your rights under the law
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7
Q

What are some other names for a payday loan? (There are five of them)

A

Cash advance loans, check advance loans, check advance loans, postdated check loans, and deferred deposit check loans

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8
Q

What is a tax refund loan? What APR has been reported on it?

A

It is a type of credit that allows you to get an advance on your tax refund. APRs as high as 774% have been reported.

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9
Q

What interest rates do car dealers, appliance stores, and department stores typically charge?

A

15% or more

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10
Q

What is a cash advance? How do you obtain one?

A

A loan billed to your credit card. You can obtain one with your credit card at a bank, an ATM, or by using hacks linked to your credit card account.

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11
Q

Do cards charge a fee? If so, what is the special fee based on?

A

Yes. It is based on a percentage of the amount borrowed, usually 2-3%

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12
Q

True or False. Most cards do have a grace period on cash advances.

A

False. You usually pay interest everyday until you repay the cash advance.

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13
Q

True or False. It is more expensive to take out a cash advance then to charge a purchase to your credit card.

A

True. If your credit card has a grace period, then you could borrow money for 0% interest if you pay the bill in full by the end of the month.

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14
Q

What type of loans do commercial banks offer? There are 5

A
  • Single payment loans
  • Personal installment loans
  • Savings account loans
  • Check-credit loans
  • Credit card loans
  • Second mortgages
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15
Q

What types of loans do consumer finance companies offer? There are 2

A
  • Personal installment loans
  • Second mortgages
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16
Q

What types of loans do credit unions offer? There are 4

A
  • Personal installment loans
  • Share-draft credit plans
  • Credit card loans
  • Second mortgages
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17
Q

What type of loans do federal savings banks offer?

A
  • Personal installment loans
  • Home improvement loans
  • Education loans
  • Savings account loans
  • Second Mortgages
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18
Q

What is the Truth in Lending law?

A

Law that requires creditors to disclose the annual percentage rate and the finance charge as a dollar amount

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19
Q

What is the finance charge? What does it include?

A

The total dollar amount you pay to use credit. Includes interest costs and other costs like service charges, credit-related insurance premiums, or appraisal fees.

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20
Q

What is the annual percentage rate (APR)?

A

The percentage cost (or relative cost) of credit on a yearly basis.

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21
Q

How do you calculate the average use of a loan?

A

Add the loan balance during the first and last month then divide by 2.

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22
Q

What are two types of major trade offs you should consider before taking on a loan?

A

Term Vs. Interest Costs and Lender Vs. Interest Rates

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23
Q

What does Term Vs. Interest Costs mean?

A

The longer the term of a loan is, the greater the amount you pay in interest.

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24
Q

What does Lender vs. Interest Rates mean?

A

It means that in order to minimize interest rates, you may need to accept conditions that reduce the lender’s risk.

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25
Q

What are some conditions that you might need to accept to reduce your interest rates?

A
  • Variable interest rate
  • Secured loan
  • Making large downpayment
  • Accepting a shorter term loan
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26
Q

What is simple interest? How do you calculate it?

A

Simple interest is interest computed on the amount borrowed (principal) only and without compounding.

To calculate it you do: Principal X Rate of Interest X Time

27
Q

How much interest do you pay on a $1,000 loan at a 5% interest rate for one year?

A

$50

28
Q

What is the declining balance method?

A

It is a method of computing interest when more than one payment is made on a simple interest loan.

29
Q

Do you pay more or less interest with the declining balance method?

A

Less

30
Q

What is the add on interest method?

A

Method in which interest is calculated on the full amount of the original principal.

31
Q

What happens to the amount of interest you pay when you pay two or more payments with the add on interest method?

A

It goes up

32
Q

What are three methods that creditors may use to calculate finance charges?

A

Adjusted balance method, previous balance method, and the average balance method.

33
Q

What is the adjusted balance method?

A

Creditors add finance charges after subtracting payments made during the billing period

34
Q

What is the previous balance method?

A

Creditors give no credit for payments made during the billing period.

35
Q

What is the average daily balance method?

A

Creditors add your balances for each day in the billing period and then divide by the number of days in the period.

36
Q

What do lenders do when they expect inflation to increase?

A

They add the expected rate of inflation to the interest rate they charge.

37
Q

What is the rule of 78s?

A

Formula used by lenders to determine how much interest has been paid at any point in a loan term.

38
Q

What is the bank discount method?

A

Creditor calculates interest on the amount to be paid back and you receive the difference between the amount to be paid back and the interest amount. Ex. If amount borrowed is $1000 and interest rate is 5% then you would receive $950.

39
Q

What is compound interest? What is the formula to calculate it?

A

Interest paid on the original principal plus accumulated interest. The formula is F = P(1 + r)^T

F = Total future repayment value of loan

P = Principal

r = Rate of interest per year (annual interest)

T = time in years

40
Q

To calculate multiple period compounding, what two adjustments must be made to the compound interest formula?

A

You would first adjust the annual interest rate to reflect the number of compounding periods per year. You would then adjust the time factor (T) to reflect the total number of compounding periods.

41
Q

What is credit insurance?

A

Any type of insurance that ensures repayment of a loan in the event the borrower is unable to repay it.

42
Q

What are the three types of credit insurance?

A

Credit life, credit accident and health, and credit property

43
Q

What is credit life insurance?

A

Ensures the repayment of the loan if the borrower dies.

44
Q

What is credit accident and health insurance? What is another name for it?

A

Insurance that repays your loan in the event of a loss of income due to illness or injury. It is also called credit disability insurance.

45
Q

What is credit property insurance?

A

Insurance that provides coverage for personal property purchased with a loan.

46
Q

What should you do when you can’t make your credit card payments on time?

A

Call your creditor right away to work out a modified payment plan.

47
Q

What special problems do automobile loans have?

A

Creditors can repossess your car any time you are in default of your payments. You will still be required to pay the difference between the selling price and the unpaid debt.

48
Q

What are seven things that debt collector agencies can’t do?

A
  • Contact you before 8 am or after 9 pm
  • Contact you at your place of employment
  • Harass you
  • Threaten you
  • Make false claims or misrepresent the amount you owe
  • Say that you will be arrested if you don’t pay the debt
  • State that they are taking legal action when they don’t intend to
49
Q

What is the Fair Debt Collection Practices Act?

A

Federal law that prohibits certain practices by agencies that collect debt for creditors. Does not apply to creditors that collect debt themselves.

50
Q

What should you do if a debt collector contacts you by phone?

A

Insist that they contact you in writing to verify that they are a legitimate debt collector

51
Q

What are five things that you should find out when you are contacted by a debt collector?

A
  • The debt collector’s identity (name, address, and phone #)
  • The amount of debt
  • What the debt is for and when it was incurred
  • The name of the original creditor
  • Info about whether you or someone else owes the debt
52
Q

What are seven reasons for indebtedness in families?

A
  1. Emotional problems
  2. Use of money to punish
  3. Expectation of instant comfort
  4. Keeping up with the Joneses
  5. Overindulgence of children
  6. Lack of communication among family members
  7. Amount of finance charges
53
Q

What are five danger signs of potential debt problems?

A
  • Missing payments or paying late
  • Using savings or having no savings
  • Borrowing money to pay old debt
  • Getting credit card revoked by issuer
  • Putting off medical or dental visits because you can’t afford them
54
Q

What is the Consumer Credit Counseling Services (CCCS)?

A

It is a local, nonprofit organization that provides debt counseling services for families and individuals.

55
Q

What two activities do the CCCS do?

A

They aid families with debt problems by helping them manage their money and set up a realistic budget and they help prevent debt problems by teaching them about budget planning and about the pitfalls of unwise credit buying.

56
Q

True or False. CCCS counseling usually costs a fee.

A

False. It is usually free but they may charge a nominal fee when the administer a debt repayment plan.

57
Q

What other places offer nonprofit counseling services?

A

Universities, military bases, credit unions, local county extension agents, and federal housing authorities.

58
Q

Bankruptcy

A

The legal process in which some or all assets of a debtor are distributed among the creditors because debtor is unable to pay his/her debts. May include a plan for the debtor to repay the creditors on an installment basis.

59
Q

What is the Bankruptcy Abuse Prevention and Consumer Protection Act?

A

A federal law that makes it harder for consumers to file Chapter 7 bankruptcy and forces them into a Chapter 13 instead.

60
Q

What happens when a person files for a Chapter 7 bankruptcy?

A

Most of their assets are sold to pay off their debt.

61
Q

What happens when a person files for a Chapter 13 bankruptcy?

A

The debtor gets put on a repayment plan to repay their debts in installments.

62
Q

How do the two fillings affect your ability to obtain future credit?

A

It may be easier to obtain credit if you file Chapter 13 bankruptcy than Chapter 7.

63
Q

True or False. Employers can discharge you after you file for bankruptcy.

A

False. The bankruptcy law prohibits employers from discharging you because you filed a bankruptcy case.

64
Q
A

Personal Finances (6 decks)

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