7.4 + 7.5

Question 1

closed-end credit

Answer 1

An arrangement, such as in secured and unsecured loans, where the full amount owed must be paid back by the borrower by a set point in time.

Question 2

installment loan

Answer 2

A system of credit that is repaid by the borrower in regular installments, such as equal monthly payments that include interest and a portion of principal.

Question 3

unsecured loan

Answer 3

A loan issued and supported only by the borrower’s creditworthiness, rather than by a type of collateral, because it is obtained without the use of property as collateral for the loan.

Question 4

promissory note

Answer 4

This is a financial instrument in which the borrower promises in writing to pay a determinate sum of money

Question 5

student loan

Answer 5

A form of unsecured credit that is designed to help students pay for university tuition and books, and sometimes their living expenses.

Question 6

secured loans

Answer 6

A loan where the borrower has pledged some asset as collateral to guarantee the loan.

Question 7

lien

Answer 7

A legal right to keep possession of property belonging to another person until a debt owed by that person is discharged; usually recorded in a county courthouse.

Question 8

cosigner

Answer 8

When a person (the cosigner) accepts the legal obligation to make payment on another person’s debt should that person default.

Question 9

acceleration clause

Answer 9

Clause in a credit contract that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met, such as missing one or more repayments.

Question 10

variable-rate loan

Answer 10

A loan where an interest rate on a loan fluctuates over time because it is tied to an underlying benchmark interest rate that changes periodically.

Question 11

prime rate

Answer 11

The interest rate banks charge their most credit-worthy customers, and it is sometimes used as a benchmark for other variable-rate loans.

Question 12

interest rate caps

Answer 12

Limits in credit contracts that prohibit how much the interest rate can increase over the life of the loan.

Question 13

fixed-rate loan

Answer 13

A loan where the contract calls for the interest rate on a loan to remain fixed either for the entire term of the loan.

Question 14

Payday lenders

Answer 14

are businesses that grant credit when they honor a personal check but agree not to deposit the check for a week or longer.

Question 15

A rent-to-own program

Answer 15

offered through a rent-to-own store provides a mechanism for buying an item with little or no down payment by renting it for a period of time, after which it is owned.

Question 16

A pawnshop

Answer 16

is a business that offers secured loans to people with items of personal property used as collateral that the borrower turns over to the pawnshop.

Question 17

A secured credit card (or collateralized credit card)

Answer 17

is a type of credit card that requires a fee to open, and it is backed by a savings account used as collateral on the credit available with the card.

Question 18

minimum payment warning box

Answer 18

The box on credit card statements must show how long it would take to pay off the card’s balance by making only the minimum payments, and how much you’d need to pay each month to clear the balance in 36 months.

Question 19

declining-balance method

Answer 19

A method of calculating the annual percentage rate for installment loans where the interest assessed during each payment period (usually each month) is based on the current outstanding balance of the installment loan.

Question 20

add-on interest method

Answer 20

A method of calculating the annual percentage rate for installment loans where interest is calculated by applying an interest rate to the amount borrowed times the number of years.

Question 21

n-ratio method

Answer 21

A method of estimating the annual percentage rate for installment loans where it is an add-on loan.

Question 22

prepayment penalty

Answer 22

An additional fee imposed by many loan agreements where a borrower pays off a loan early, before its scheduled pay-off date.

Question 23

rule of 78s

Answer 23

This is the most widely used method of calculating a prepayment penalty where the lender allocates the interest charge on a loan across its payment periods using the numerical values to the sum of all the digits of the periods.