Chapter 7 Flashcards
Give three examples of inexpensive loans.
family; loans based on assets such as using CD as collateral; loans to finance education (from the DOE)
Give two examples of medium-priced loans.
commercial banks/credit unions; auto/home improvement loans
Give two examples of expensive loans.
retailers such as auto/appliance dealers; bank credit cards and cash advances
Give two examples of VERY expensive loans.
finance companies/payday loans; pawn shops and check cashing stores
What is another name for the Truth in Lending Law?
Consumer Credit Protection Act
When was the Consumer Credit Protection Act passed?
1969
What is the Truth in Lending Law/Consumer Credit Protection Act?
the federal law that requires creditors to disclose the APR and the finance charge as a dollar amount
What is finance charge?
the total dollar amount you pay to use credit
Finance charge includes
interest costs, service charges, credit-related insurance premiums, or appraisal fees
What does APR stand for?
annual percentage rate
What is APR? (2)
the percentage cost of credit on a yearly basis; true rate of interest, so you can compare rates with other sources of credit
What percent of U.S. households have no debt?
15%
What percent of U.S. households have mortgage-only debt?
3%
What percent of U.S. households have consumer-only debt?
45%
What percent of U.S. households have mortgage + consumer debt?
37%
Define term versus interest costs.
Longer term loans = lower payments, but more total dollar interest paid
Define lender risk versus interest rate.
Greater risk = higher cost of credit = higher interest rate
What are 4 ways to reduce the lender’s risk and the interest rate?
accept a variable interest rate; provide collateral to secure the loan; make a larger down payment up front; have a shorter loan term
What is simple interest? (2)
the dollar cost of borrowing; computed on principal, only and without compounding
How do you calculate simple interest?
interest = principal * rate * time
What is simple interest on the declining balance? (2)
interest paid only on the amount of original principal not yet repaid; principal is reduced equally each year
Write out the simple interest on declining balance flowchart.
write out slide 10 of 30
What is add-on interest?
interest calculated on the full amount of the original principal, added to the principal, and the total of both is divided by the number of payments to be made
Write out the add-on interest flowchart.
write out slide 11 of 30
What is the adjusted balance method?
Finance charges are calculated after subtracting payments made during the billing period
What is the previous balance method?
Finance charges are calculated before payments are
made during the billing period
Which interest method do credit card issuers usually use?
average daily balance method
What is the average daily balance method? (3)
add your balances for each day in the billing period; divide this total by the number of days in the billing period; multiply this average by the monthly interest rate
Write out the example of average daily balance.
write out slide 13 of 30
How does inflation affect interest rates?
Borrowers and lenders are more concerned about the purchasing power of dollars, rather than the actual credit used - so they add inflation expectations to the interest charged
How do taxes affect interest rates?
interest paid on consumer credit is not tax deductible
What is the minimum payment trap?
Paying the minimum (about $40) on a $1,000 balance at 22% interest will take 6.5 years to pay off and the total payment will be $1,660
What is credit insurance? (3)
the loan will only be paid off if the insured dies or becomes disabled; VERY expensive; decline it
What is the full name of the Credit Card Act?
Credit Card Accountability, Responsibility, and Disclosure Act of 2009
What are the FIRST 6 stipulations of the Credit Card Act?
limits APR increases in first year; stops issuers from increasing APR rates on existing balances; teaser rates must be for at least 6 months; must mail statements at least 21 days before payment is due; disclosure statement must be clear and timely; issuers must post card agreements on internet - LSTMDI
What are the SECOND 4 stipulations of the Credit Card Act?
requires statements to report due dates/late fees/total costs of only making minimum payments; sets consistent due date for each month; restricts penalties for over-the-limit fees; can’t issue to card under 21 w/o cosigner
What is CCCS?
Consumer Credit Counseling Services - a non-profit debt counseling service
What is the average age of a CCCS client?
38
What is the male:female CCCS client ratio?
43:57
What percentage of CCCS clients are single and married?
31% and 48%, respectively
What is the average debt of a CCCS creditor?
$20,045
What is bankruptcy?
legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts
Women account for what percentage of bankruptcies?
36%
How many people declared bankruptcy in 2005?
2 million
What legislation was passed in 2005 to prevent bankruptcy fraud?
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
What is the average age of a bankrupt party?
38
What percentage of bankrupt parties are couples?
44%
(T/F) Bankrupt parties tend to be less educated than the general public.
False, they tend to be more educated
What fraction of bankrupt parties have lost jobs?
2/3
What percentage of bankrupt parties have serious health problems?
50%
Describe Chapter 7 bankruptcy. (6)
submit a petition to the court that lists assets and liabilities + paying a filing fee; most (but not all) debts are forgiven; assets sold to pay creditors; some assets, like a 401k, can be kept; fresh start; most common and severe form of filing for bankruptcy
What is the most common form of filing for bankruptcy?
Chapter 7
What is the most severe form of filing for bankruptcy?
Chapter 7
After Chapter 7, what will you still owe? (4)
certain taxes + fines; child support and alimony; educational loans; debts from willful or malicious acts
What is Chapter 13 bankruptcy?
voluntary plan proposed to the bankruptcy court
for those who want to pay a portion of their debt
over a period up to 5 years
What are the requirements for Chapter 13 bankruptcy? (4)
must have regular income; can’t have more than $250k in unsecured debt or $750k in secured debt; payments made to trustee who distributes money to creditors; court may allow you to keep property + pay less than full amount of debts
