BFIN210 exam 2 Flashcards
what are the 5 C’s of credit? and what do they determine?
- Condition: the purpose of the loan
- Capacity: How you plan to pay the loan
- Collateral: a form of security that guarantees repayment.
- Character: demonstrated responsibility and integrity of your actions
- Capital: what you have personally invested in the company
they determine whether or not to loan you money, how much to loan you, and how much to charge you
what C would match your credit score?
Character, based on credit reports and a credit scored assigned by the credit bureau
Which one of the 5 C’s of Credit is most important and controllable by you?
Character
what are minimum payments on a credit card and Why are they so dangerous?
they are payments required to remain a borrower in good standing
but if you only pay the minimum payment you’ll be kept in debt and paying interest
Why should you avoid cash advances from a credit card?
credit cards charge fees and high levels of interest for this service/ a very expensive way to borrow money
and interest starts being charge immediately
What is the biggest risk associated with debt consolidation using a credit card?
Obtaining a larger balance being that you are using more credit to pay off your balance
what type of loan are Credit Cards and describe them
You are required to make minimum payments to remain a borrower in good standing.
-Unsecured loan (not backed by collateral)
-Usually an interest –free grace period, but for purchases only
what is a Revolving credit
where you can spend up to a credit line (limit) and leave it there
what are the different types of loans
credit card, business, payday, cash advance, personal, auto, home, mortgages, dept consolidation, and student loans.
why are credit cards so risky
its easy to spend money that’s not yours
what is the difference between convenience users and credit users
what would be the case for the average person
convenient users pay off their entire credit card balance each month and therefore pay NO interest!
Credit users carry a balance from month to month and end up paying interest.
most people are BOTH because they sometimes pay off their balance, but sometimes struggle to do so, and end up paying interest
what features do different types of credit users find important
Credit users focus on low apr because they’re more likely to pay and are weak budgeters
Convenience users focus on
-Long grace periods,
-low annual fee, and
-free benefits because they’r more worried about maximizing benefits and minimizing the bad
people who are both worry about all the above
What is a grace period
the time given to make a payment before interest is charged
- also known as the convenience users best friend
if you pay a balance in full before the end of Grace Period, you are NOT charged interest
what is a credit card teaser rate
its a promotional program in which the interest rate on the credit card is TEMPORARILY reduced to reel more people in
may only apply to balance transfers not new purchases
-accrued interest
are there grace periods for cash advances
NO!
what is accrued interest
when interest still accrues from the date of purchase, and if you do not pay off balance in full by the end of the promotional period, that accrued interest will be assessed and added to your balance
what is a balance transfer
it is a form of debt consolidation (Pay off balance with company A using a credit card from company B
often used to obtain a lower APR when you are force to carry a balance, sometimes as low as 0% for a limited time
what are some examples of credit card perks and who are they best for?
EX: Cash back, product discounts, and frequent flyer miles
bet for cardholders who:
charge a lot but always pay bills in full(Convenience users)
what are some words in Contract language?
The Note: the formal doc that outlines the legal obligations of both the lender and the borrower
Security agreement: an agreement that identifies whether the lender or the borrower retains control over the item being purchased (collateral)
Default: The failure of a borrower to make a scheduled interest or principal payment
Clauses: “what happens in the case of “
- acceleration clause: entire balance due immediately in case of missed payment
-deficiency payments clause: enables lender to collect remainder after sale of asset
-Recourse clause: what other actions the lender can take to seek repayment?
what is the cost of borrowing
APR ( Annual Percentage Rate)
- used to determine the finance charges
-expressed as a percentage on an annual basis
the truth lending act requires all consumer loan agreements disclose APR in bold print
what are some factors that goes into a loan
of payments to make
More risk to the LENDER means more cost to YOU! A higher APR!
-Your own personal credit score
Collateral
Fixed or Variable Rates
How long to borrow?
Source of credit
review decision slides
What reduces risk to the lender will reduce the cost of your loan.
Strong buyer credit rating (Personal credit score)
Variable Rate loans
Short loan term
Loans with collateral
Large down payment
Do not make a decision based on the financial impact only – smart personal finance decisions always balance finance with lifestyle and budgetary risk.
What is the difference between fixed and variable interest rates
fixed APR stays the same
variable is when IR varies based on the market interest rate
Secured vs unsecured loan
secured if the borrower defaults the lender can sell the asset to make back their money
Shorter term vs longer
S: Lender gets their money sooner
Relative monthly payment is larger
Total interest paid is less
L:Lender has to wait longer to get their money back
Smaller monthly payments
Total interest paid is more
Lowest cost sources, if available to you.
Family, Home equity loans (loans against the equity in your home), and Cash value life insurance loans; Loans against retirement accounts
Medium cost source
Credit unions, S&Ls and commercial banks, and Retail stores
High cost sources
Credit cards, Payday loans, and pawn shops…
personal strategies for reducing debt
- Negotiate lower interest rate or pay off debts using a home equity line of credit, or Pay as much as you can to the high interest debts first (HIGHEST APR)
- Reduce the number of debts you have
-Pay off smallest debts first. (LOWEST BALANCES)
-Consolidate to a lower cost loan or utilize a special offer
counseling strategies for reducing debt
when you get professional help to define and implement debt reduction strategies.
bankruptcy (last resort) strategies for reducing debt
Court supervised help in getting you on a plan to payoff your debts.
Trustee sells all nonexempt property/assets to pay off as much debt as possible
Most remaining debts get eliminated.
NOT child support, alimony, student loans, or taxes.
Very damaging to your credit rating.
what are the steps in a smart buying process
Step 1: Differentiate Want From Need
Step 2: Do Your Homework
Step 3: Make Your Purchase
Step 4: Maintain Your Purchase
the more cost the more time you take
why is making a list important when buying a vehicle?
to know the features you don’t really want, so you don’t pay for them…and ensure you get the ones you must have.
what is meant by do your hw (4 areas)?
Affordability, comfort/liking, reliability and safety(car history)
total cost is a function of what factors
Down payment, Monthly payment, Operational costs, Maintenance, Insurance, etc
what is the formula for payment amount that you can afford?
Amount available in Monthly Budget - monthly fixed costs (1/12 of annual) - monthly variable costs
Make Your car Purchase but do what first?
Choices - Know what you want and do not want BEFORE negotiating.
Price - Know what you want to pay for the vehicle.
Financing - Know what your options are for paying.
Trade - Know what you will do with your current vehicle
what is the formula for depreciation
loss of value of the asset due to use/age
who drives the conversation and choices?
The buyer
Be prepared to leave the dealership at least 1 time.
Take your time making the decision
how can you secure the best price for a car
Approach multiple dealers get written quotes to take
Always leave to ”think about it” and “consider your options”
Never talk in terms of a payment!
Payment is a function of time, price, down payment (trade) and interest rate
financing (car)
Cash
Dealer Financing
Your own bank/credit union
Remember to evaluate both opportunity cost and liquidity impacts.
Do not extend the term too long to try to afford a car that’s really too expensive.
Why? What other risks?
used vs new car
used will need repairs
Any negatives add to your negotiating power!
Selling a Used Vehicle? Knowing the answers adds to your power position.
leasing a car
Should be primarily based on lifestyle, for people who, Want new car every few years
Drive less than 15,000 miles annually
Leasing vehicles with a high level of depreciation can be very expensive and costs can be comparable or more than purchasing the vehicle.
3 factors of leasts costs
-Depreciation Fee=(Net Cap Cost – Residual)/ Term
-Financing Fee= ( Net Cap Cost + Residual ) × Money Factor
Money factor = APR / 2400
-Sales Tax
the 2 solutions * 1+IR
