Chapter 6 Vocab

Question 1

annual percentage rate (APR)

Answer 1

the yearly interest rate quoted a financial institution loan a loan. The APR may be compounded more frequently than once a year, in which case the effective annual rate on the loan will be higher than the APR

Question 2

adjusted balance method

Answer 2

the assessment of finance charges after payments during the billing period have been subtracted
- adds interest after subtracting payments made during the billing period

Question 3

previous balance method

Answer 3

a method of computing finance charges that gives no credit for payments made during the billing period
- gives no credit for payments made during the billion period;

Question 4

average daily balance method

Answer 4

a method of computing finance charges that uses a weighted average of the account balance throughout the current billing period
- most fair - creditors add your balances for each day in the billing period and then divide by the number of days in the period

Question 5

credit insurance

Answer 5

any type of insurance that ensures repayment of a loan in the event the borrower is unable to repay it
- pays lender directly
3 types: credit life, credit accident and health, credit property `

Question 6

consumer proposal

Answer 6

a maximum five year plan for paying creditors all or a portion of a debt owed

Question 7

sources of inexpensive loans

Answer 7

parents and family members

laons based on assets such as GIC

Question 8

medium priced loans

Answer 8

chartered banks, trust companies and credit unions

- provide credit life insurance, generally sympathetic to borrowers with payment problems,

Question 9

expensive loans

Answer 9

finance companies, retailers such as car or appliance dealers, bank credit cards and cash advances – lend to peopel who can’t otain credit cards from banks or credit unions - high interest -

Question 10

effective annual interest rate depends on….

Answer 10

quoted annual percentage rate, how frequently interest is compounded, interest charged up front, other charges such as service charges, credit related insurance premiums, and appraisal fees
- basically after the annual percentage rate quoted is actually plugged into math
EAR = (1+ APR/ m)to the power of m - 1

Question 11

trade offs: longer terms…

Answer 11

allow lower monthly payments but you pay more interest

Question 12

what is lender risk?

Answer 12

defaulting on the loan

Question 13

trade offs: what can reduce the lender’s risk?

Answer 13

accept a variable interest rate
provide collateral to secure the loan
make a large down payment up front
have a shorter loan term

Question 14

fixed rate installment loan

Answer 14

pay off over a pre determined period of time

• same monthly payments
• blend of interest and principal
• payments gradually decrease

Question 15

fixed rate installments: as loans approach maturity,….

Answer 15

more of the monthly payments are used to pay off the principal other than to pay interest

Question 16

floating rate personal line of credit

Question 17

expected inflation

Answer 17

• inflation erodes purchasing power of money, the expected rate of inflation is added to the interest rate charged by lenders to protect their purchasing power, added to the interest rate charged by lenders to protect their purchasing power

Question 18

minimum monthly payment trap

Answer 18

the smallest amount you can pay and still be a cardholder in good standing - pay more in interest

Question 19

most common kind of credit insurance purchased

Answer 19

credit life insurance - provides repayment of loan if borrower dies

Question 20

two types of credit contracts

Answer 20

secured contracts and unsecured contracts

Question 21

civil division of provincial court

Answer 21

debt less than 50,000

Question 22

court of queens bench

Answer 22

50,000 or more

Question 23

3 steps to debt management

Answer 23

combine to reduce number of debts
renegotiate to reduce interest charges
target to maximize your results

Question 24

fold down plan

Answer 24

a good alternative to a consolidation - all you need to do is find a little spare money

• list debts from highest to lowest (APR) , if same APR, list lower balance first
• determine minimum required payment for each debt
• reevaluate budget
• add extra money to minimum payment of debt with highest interest rate (so you’re paying more than the minimum amount)
• continue with minimum amount with others
• once one is added, take that extra money and do the same with the next one

Question 25

federal legislation: 3 optios for consumers with varying financial difficulty

Answer 25

orderly payment of debts
consumer proposal
bankruptcy

consumer proposal and bankruptcy done with trustee
orderly payment of debts is done with money mentors

Question 26

orderly payment of debt or credit

Answer 26

ability to pay in 4-5 years through payment

lower debt load, higher cash flow

Question 27

consumer proposal

Answer 27

ability to pay portion in 2-5 years, through lump sum

- moderate debt load/ cash flow

Question 28

bankruptcy

Answer 28

no ability to pay all or portion of debt in 5 years

high debt load, no cash flow

Question 29

consolidation loans

Answer 29

advantages are single interest rate on all your debts and ability to extend them to allow you to make smaller payments, disadvantages are that there’s a very high interest rate