Finance Chapter 7

Truth in lending law A federal law that requires creditors to disclose the annual percentage rate (APR) and the finance charge as a dollar amount
Finance charge The total dollar amount paid to use credit
Annual percentage rate (APR) The percentage cost (or relative cost) of credit on a yearly basis. The APR yields a true rate of interest for comparison with other sources of credit
Simple interest Interest computed on principle only and without compounding
Declining balance method A method of computing interest when more than one payment is made on a simple interest loan
Add-on interest method A method of computing interest in which interest is calculated on the full amount of the original principle
Adjusted balance method The assessment of finance charges after payments made during the billing period have been subtracted
Previous balance method A method of computing finance charges that gives no credit for payments made during the billing period
Average daily balance method A method of computing finance charges that uses a weighted average of the account balance throughout the current billing period
Rule of 78s A mathematical formula to determine how much interest has been paid at any point in a loan term
Credit insurance Any type of insurance that ensures repayment of a loan in the event the borrower is unable to pay it
Fair debt collection practices act (FDCPA) A federal law, enacted in 1978, that regulates debt collection activities
Consumer credit counseling service (CCCS) A local, nonprofit organization that provides debt counseling services for families and individuals with serious financial problems
Chapter 7 bankruptcy One type of personal (or straight) bankruptcy in which many debts are forgiven
Chapter 13 bankruptcy A voluntary plan that a debtor with a regular income develops and proposes to a bankruptcy court
You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13 bankruptcy. True
There are no costs involved in filing for a bankruptcy. False
If you borrow $100 at 10 percent simple annual interest and repay it in one lump sum at the end of one year, you will have to pay: $110
Chandler borrows $1,000 for school this year. He is charged $50 in interest and pays a onetime fee of $15. What is the cost of financing and the APR? 6.5%
Which of the following is a local organization affiliated with the National Foundation for Consumer Credit that provides debt counseling services for families and individuals? Consumer Credit Counseling Service
Using your financial calculator, solve for APR assuming you borrow $300 and pay it back in equal payments each quarter for the next 4 quarters at a 12% APR? What is the payment and what is the effective interest rate? PMT=$80.71EFF=12.55%
What is (are) the signal(s) of potential debt problems? -Paying only the minimum balance each month -Missing payments or paying late -Using savings to pay normal bills-Depending on overtime to meet normal expenses
All of the following will help you avoid bankruptcy EXCEPT: Financing your car for more than 3 years
The total dollar amount you pay to use credit is called the: Finance charge
Your bankcard has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging your interest on cash advances immediately. You get a cash advance of $600 on the first day of the month. You get your credit card bill at the end of the month. What is the total finance charge you will pay on this cash advance for the month? $21
A student borrows $500 for one year, and is charged $50 in interest. He/she also pays a fee of $10 for the loan. What is the total cost of financing and the APR? $60 financing cost with a 12% APR
A student has two credit card offers. Credit card “A” has an 17% per annum interest rate with no fee, while credit card “B” has an 12% per annum interest rate with a $50 annual fee.If the student maintains an average balance at month end in excess of $______, he/she should select the card “B” which has a lower rate with an annual fee. (i.e. what is the break-even point?) $1,000
A student takes a $200 cash advance on his credit card in January. The cash advance fee is 2% of the amount withdrawn. In addition, he/she does not pay off the $200 balance on the credit card at month end. The credit card carries an 12% per annum interest rate.The student just received his February credit card statement. Assuming the beginning January 1 balance was zero, how much money could the student have saved in January had he/she not taken out the cash advance and paid off the balance due on time? $6
You are shopping for a TV, and three stores carry the same model for $300 each. Each store charges 18% interest per annum, has a 30 day grace period, and sends out their bills on the first of the month. Each store calculates the finance charge using different methods:Store A Average daily balance methodStore B Adjusted balance methodStore C Previous balance methodAssume you bought the TV on May 5, and made one payment of $100 on June 15. What is the cost of financing with each store for the month of June? Store AAverage daily balance=(30015)+(20015)=7,500(7,500/30)=250(1.5%*250) = 3.75%Store BAdjusted balance=Total balance-payment(300-100)=200(200*1.5%)= 3%Store CPrevious balance=(300*1.5%)= 4.5%
If you finance a car with a dealer, most likely you’ll pay interest calculated with the “add on interest” or “tack on interest” method (which not surprisingly works in the favor of the dealer). During the life of the loan, interest is paid on the full amount borrowed, even though some principal is paid back each month.A student buys a car as follows:Down payment – $ 2,000Amount financed – $ 9,000Total cost of car – $11,000Finance charge – Add on interest @ 10% per annum over 4 years (48 months)What is the monthly payment and APR of this loan using your HP 10BII? $262.50/month with an APR of 17.6%
A Navy petty officer needs cash and goes to a paycheck advance company for some money. He/she agrees to pay $560 in two weeks (when his/her paycheck arrives) in exchange for $500 today.What is the interest rate implicit in this loan? 297%p/y=365 PV=-500 FV=560 PMT=0Solve for Interest
Which of the following is NOT required to obtain your free credit report? Your credit card number

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