Finance Chapter 7

3 questions before you borrow money do i need a loancan i afford a loancan i qualify for a loan
avoid credit in how many situations 2
situation 1 when you do not need or really want a product that will require financing
situation 2 if you can afford to pay cash, dont use credit!
installment carry what kind of interest rates lower
this makes installment loans the less expensive credit option for what kind of loans loans that are repaid over a period of many months or years
float period certain number of days when no interest is charged
inexpensive loans- who are often the source of these? parents or family members
what else is relatively inexpensive money borrowed on financial assets held by a lending institution
ex of money borrowed on financial assets held by a lending institution bank certificate of deposit or the cash value of a whole life insurance policy
interest rates on these loans are usually 5-7%
trade off is that your assets are tied up until you have repaid the loan
where can you get medium priced loans commercial banks, federal savings banks, and credit unions
some advantages of borrowing from credit unions have free credit life insuranceusually sympathetic to borrowers with legit payment problemsprovide personalized service
expensive loans available from finance companies, retailers and banks through credit cards
what kind of people do finance companies lend to people who cant obtain credit from banks or credit unions
where are inexpensive loans for education available from? the us department of education
how is the interest you pay different from commercial rates it is lower
why? because the federal government subsidizes the rates
student loans are what borrowed money that must be repaid with interest
truth in lending law federal law that requires creditors to disclose the annual percentage rate (APR) and the finance charge as a dollar amount
how can you compare credit prices from different sources? if you know the APR and the finance charge
finance charge total dollar amount you pay to use credit
finance charge includes what interest costs and sometimes other costs like service charges
ex of finance charge borrowing 100 $ for a year might cost you 10 dollars in interestif theres also a service charge of 1 dollar, finance charge will be 11
annual percentage rate (APR) percentage cost or relative cost of credit on a yearly basis
apr is key to comparing costs, regardless of what amount of credit or how much time you have to repay it
suppose you borrow 100 for one year pay finance charge of 10
keep the 100 for the whole year and pay it back all at once, you pay how much apr 10%
on average, you had what full use of 100$ throughout the year
how to calculate average add loan balance during first and last month, then divide by 2
ex: 100+100/2 = 100
however, if you repay the 100 in 12 equal monthly payments, what happens you dont get use of the 100 for the whole year
instead, what happens you get to use less and less of the 100 each month
in this case, the 10 dollar charge for credit is how much apr 18.5%
you are paying 10% interest on 100 even though what you only had use of 91.67 during the second month, not 100
calculate the average 100+8.37/2 = 54.18
why do many people choose longer term financing? because they want smaller monthly payments
the longer the term for a loan at a given interest rate means the greater the amount you must pay in interest rate charges
variable interest rate based on fluctuating rates in the banking system, like the prime rate
with this type of loan, you share interest rate risks with who the lender
because of this, the lender may offer you a lower initial interest rate than what than a lender with a fixed rate loan
what happens if you pledge property or other assets as collateral you’ll probably receive a lower interest rate on your loan
many lenders believe you have a higher stake in repaying a loan if you what pay cash for a large portion of what youre financing
what do you forgo when you make a large down payment interest that you might earn in a savings account
shorter the period of time for which you borrow smaller the chance that something will prevent you from repaying, AND the lower the risk to the lender
2 most common methods of calculating interest compound and simple interest formulas
simple interest interest computed on principal only and without compounding
amount borrowed called principal
formula for simple interest interest = principal x rate of interest x timeI = P x r x T
APR formula r = (2 x n x I)/P(N+1)r = approx APRn = number of payment periods in a year (12 – monthly, 52- weekly)I = total dollar cost of creditP = principal or net amount of loanN = total number of payments scheduled to pay off the loan
relative lend you 1,000 to buy somethingagree to 5% interest and you will repay loan at end of 1 year using simple interest formula the interest will be 5% of 1,000 for 1 year, soI = 1,000 x 0.05 x 1 = 50$
APR = (2 x n x I)/ P(N+1)= (2 x 1 x 50)/ 1000(1+1)= 100/2,000= 0.05 = 5%
simple interest on the declining balance when more than one payment is made on a simple interest loan, this method is used
the more frequent the payments means what the lower interest you will pay
why is that? because you pay interest only on the amount of the original principal you have not repaid
1,000 loan on 5% interest, paid back in 2 payments1 at end of half yr1 at the other end of the second half year first payment1000 x 0.05 x (1/2)= 25$ interest plus 500, or 525$second payment500 x 0.05 x (1/2)12.50 + remaining balance of 500 = 512.50
total payment on the loan 525 + 512.50 = 1,037.50
APR formula (2 x n x I) / P (N + 1)=(2 x 2 x 37.50)/ 1,000 (2+1) =150/ 3,000 = 0.05= 5%
add on interest method method of computing interest in which interest is calculated on the full amount of the original principal
interest amount is immediately added to what the original principal
payments are determined how by dividing principal plus interest by the number of payments to be made
when does this method produce the same apr as the simple interest method? when only 1 payment is required
consider 2 payment loan above ^ using add on methd, interest of 50$ (5% of 1000 for one year) is added to the 1,000 borrowed, giving 1,050 to be repaidhalf (525) repaid at the end of the first half of the yearother half repaid at the end of the year
even though relatives stated interest rate is 5%, real interest rate is whatAPR= (2 x n x I) / P (N +1)=2 x 2 x 50$/ 1,000 (2 + 1)= 200/3,000 = 0.066= 6.6%
add on interest method means what no matter how many payments you make, interest will always be 50$
as number of payments increases what happens you have use of less and less credit over the year
adjusted balance method assessment of finance charges after payments made during the billing period have been subtracted
previous balance method method of computing finance charges that gives no credit for payments made during the billing period
average daily balance method (fairest method) method of computing finance charges that uses a weighted average of the account balance throughout the current billing period
how do they do average daily balance method add balances for each day in billing period and divide by number of days in the period
creditors must tell you what 1. how they calculate finance charge2. when finance charges on your credit account begin so you know how much time you have to pay your bills before a finance charge is added
what is the “minimum monthly payment” the smallest amount you can oay and still be a cardholder in good standing
rule of 78s math formula to determine how much interest has been paid at any point in a loan term
formula favors who lenders
what does it dictate that you pay more interest at the beginning of a loan, when you have the use of more of the money, and you pay less interest as debt is reduced
credit insurance any type of insurance that ensures repayment of a loan in the event the borrower is unable to repay it
3 types of credit insurance credit lifecredit accident and healthcredit property
most commonly purchased type of credit insurance credit life insurance
credit life insurance provides what repayment of the loan if the borrower dies
credit accident and health insurance also called what credit disability insurance
what does credit accident and health insurance do repays your loan in the event of a loss of income due to illness or injury
credit property insurance does what provides coverage for personal property purchased with a loan, might also insure collateral property like a car or furniture
fair debt collection practices act (FDPCA) regulates debt collection activities
this prohibits certian practices by who AGENCIES that collect debts for creditors
the act doesn’t apply to who creditors that collect debts themselves
consumer credit counseling service (CCCS) nonprofit organization that provides debt counseling services for families and individuals with serious financial problems
how is it supported by contributions from banks, credit unions, merchants, etc
bankruptcy legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor cant pay his debts
bankruptcy might also include a plan for what debtor to repay creditors on an installment basis
why is declaring bankruptcy a last resort it severely damages your credit rating
debtors wanting to erase all debts have to wait how long before they can file bankruptcy again? 8 years
chapter 7 bankruptcy one type of personal or straight bankruptcy in which many debts are forgiven
what is a debtor required to do in chapter 7 bankruptcy draw up a petition listing his or her assets and liabilities
person filing for relief under the bankruptcy code is called what a debtor (term bankrupt isnt used)
most of the debtors assets are sold to do what pay off credirots
chapter 13 bankruptcy also called what wage earners plan
chapter 13 bankruptcy a voluntary plan that a debtor with regular income develops and proposes to a bankruptcy court
in this bankruptcy what happens to the property of the debtor he keeps it
during this time the debtor does what makes payments to chapter 13 trustee
the trustee does what with the payments distributes it to the creditors

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