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Personal Finance > Chapter 7: Using Consumer Loans > Flashcards

Chapter 7: Using Consumer Loans Flashcards

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1
Q

a formal, negotiated contract that specifies both the terms for borrowing and the repayment schedule.

A

consumer loans

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2
Q

type of loan that is a 1-shot transaction for a specific purpose, generally, for purchasing big-ticket items.

A

consumer loans

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3
Q

no credit card or checks are issued w/ consumer loans.

A

true

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4
Q
  1. auto loans
  2. loans for other durable goods
  3. education loans
  4. personal loans
  5. consolidation loans

These are examples of…

A

consumer loans.

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5
Q

what percentage of the costs of a car can be financed w/ an auto loan?

A

80-90%

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6
Q

what type of consumer loan requires a down payment of the remainder not offered by the loan amount itself and the item itself as a form of collateral during the 36-60 month loan maturity?

A

auto loans

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7
Q

what type of consumer loan has maturities that range from 9-12 months for less expensive items and 10-15 years for more expensive items?

A

loans for other durable goods

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8
Q

what type of consumer loan finances undergraduate or graduate studies?

A

education loans

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9
Q

what type of consumer loan is an unsecured loan for non-durable expenditures?

A

personal loans

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10
Q

what type of consumer loan is used to straighten out an unhealthy credit situation?

A

Consolidation loans

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11
Q

loans made for a specified period, at the end of which time payment in full is due and has maturities of 30 days - 1 year.

A

single-payment loans

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12
Q

loan that is a type of interim financing.

A

single-payment loans

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13
Q

loans that are repaid in a series of fixed, scheduled payments, usually on a monthly basis and the repayment period ranges from 6 months to 6 years.

A

installment loans

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14
Q
  1. William D Ford Federal Direct Loan Program (Direct)
  2. Federal Perkins Loans
  3. Parent Loans for Undergraduate Students (PLUS)

What are these?

A

student loans

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15
Q

a type of direct loan where the department of education pays interest while the student is in school.

A

subsidized loan programs

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16
Q

a type of direct loan where the student is responsible for all interest payments.

A

unsubsidized loan programs

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17
Q

in order to be eligible for a student loan, one must:
1. demonstrate a financial need
2. make satisfactory progress in academic program

A

true

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18
Q

how is a financial need assessed for determining eligibility for a student loan?

A

cost of attending school - amount student can afford to pay

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19
Q

when does loan repayment begin?

A

after school is complete

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20
Q

you can request:
1. extended payment
2. graduated repayment schedule
3. income-contingent repayment plan

for your…

A

student loans.

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21
Q

student loans are dischargeable in bankruptcy proceeding.

A

false; student loans are not dischargeable in bankruptcy proceeding.

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22
Q

what is the maximum student loan amount that a student should obtain based upon?

A

expected future salary

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23
Q

on consumer loans, are:
1. fixed rates
2. variable rates
more common?

A
  1. fixed rates
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24
Q

on longer-term installment loans, variable rates are becoming more common.

A

true

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25
Q

what do variable rates change in correlation to?

A

the market

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26
Q
  1. commercial banks
  2. consumer finance companies
  3. credit unions
  4. savings and loan associations
  5. sales finance companies
  6. life insurance companies
  7. friends and family

These are the 7 sources of…

A

consumer loans.

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27
Q

commercial banks offer lower interest rates than most lenders and only lend to those who are account holds w/ good credit ratings.

A

true

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28
Q

what source of consumer loans obtains funds through stockholders and open market borrowing?

A

consumer finance companies (small loan companies)

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29
Q

consumer finance companies offer consumer loans of $5,000 or less with high interest rates and collateral because they offer to higher-risk costumers.

A

true

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30
Q

consumer finance companies are governed by an…

A

interest-rate ceiling (usury laws).

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31
Q

credit unions only grant consumer loans to members for the best borrowing opportunities and low interest rates.

A

true

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32
Q

savings and loan associations offer similar interest rates on consumer loans as commercial banks.

A

true

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33
Q

sales finance companies offer consumer loans at a much higher rate, especially if the original dealer is involved in the financing process.

A

true

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34
Q

a process where merchants sell their loans to a 3rd party.

A

“selling paper”

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35
Q

the most significant sales finance company is captive…

A

finance companies.

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36
Q

what source of consumer loans offer death benefits and savings functions?

A

life insurance companies

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37
Q

life insurance companies make loans against cash of certain types of policies, meaning that they, furthermore, don’t need to be repaid because they decrease your coverage.

A

true

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38
Q

the amount of accumulated savings.

A

cash value

39
Q

is it advisable to loan from family or friends? Why or why not?

A

no, because it is a last resort

40
Q
  1. How does the transaction fit into my financial plans?
  2. How do the required debt payments on the loan fit into my monthly cash budget?

These are the questions you should ask when…

A

choosing the type of credit that is most suitable for you

41
Q
  1. finance charges
  2. loan maturity
  3. total cost of transaction
  4. collateral
  5. payment date
  6. prompt and convenient obtainment of loan
  7. late payment charges
  8. prepayment penalties or refunds

These are the 8 factors of…

A

consumer loans that should be considered to determine their suitability to a borrower.

42
Q

effective interest rate and any potential fixed or variable rates.

A

finance charges

43
Q

stated cost of money and any additional fees required on the loan.

A

annual percentage rate (APR)

44
Q

make sure the size and number of loan payments will fit into your spending and savings plans.

A

true

45
Q

what do you do to lower loan costs?

A

shorten maturity period

46
Q

what do you do to produce more affordable monthly loan payments?

A

lengthen loan maturity period

47
Q

the price of the item + the price of the credit =

A

the total cost of the transaction.

48
Q

to calculate the cost of a transaction, add the amount put down on the purchase to the total of all monthly loan payments.

A

true

49
Q

consumer loans with collateral, typically, have lower…

A

interest rates.

50
Q

how much may interest rates be lowered for loans w/ collateral?

A

up to 0.5%

51
Q

you should only obtain a consumer loan if the loan has the desired effects on financial…

A

condition.

52
Q

take periodic inventory of outstanding consumer debt every…

A

3-4 months or, at least once per year

53
Q

what is an ideal debt safety ratio under?

A

10% or lower

54
Q

how must single-payment loans be paid?

A

with 1 payments that consists of both interest and principal on the due date

55
Q

single-payment loans are useful when funds are temporarily unavailable, but expected in the future.

A

ture

56
Q

A form that gives lending institutions information about the purpose of a loan, whether or not it’s secured, and the applicant’s financial condition.

A

loan application

57
Q

lenders usually choose items are collateral that are readily marketable at a high enough price to cover the…

A

principal of the loan.

58
Q

a legal claim that permits lenders to liquidate collateral to satisfy the loan if the borrower defaults.

A

lien

59
Q

instrument that gives lenders title to moveable property in the event of default.

A

chattel mortgage

60
Q

agreement giving lenders the right to sell collateral in case of default.

A

collateral note

61
Q

maturity on single-payment loans are usually within…

A

1 year or less.

62
Q

a set percentage of interest that would have been paid over the remaining life of the loan.

A

prepayment penalty

63
Q

a prepayment penalty must be disclosed in accordance with what act?

A

the Truth in Lending Act

64
Q

when original loan is paid off by taking out another loan.

A

loan rollover

65
Q

how many times can you receive a loan rollover?

A

no more that 2 times as an absolute max

66
Q

a statement that discloses the interest costs and any other fees added into the loan.

A

loan disclosure statement

67
Q

what are the 2 methods of calculating interest?

A
  1. simple interest method
  2. discount method
68
Q

what interest method is charged only on the actual loan balance outstanding?

A

simple interest method

69
Q

what interest method calculates the total finance changes on the full principal amount which is subtracted from the loan amount, meaning the finance charges are deducted from proceeds upfront?

A

discount method

70
Q

loan amount x interest rate x loan term =

A

simple interest AND discount

71
Q

annual percentage rate = average annual finance charge / average loan balance outstanding

A

true

72
Q

installment loan maturity takes anywhere from 6 months to 7-15 years.

A

true

73
Q

loans secured by a 2nd mortgage on a house.

A

home equity loan

74
Q

interest only charged on the outstanding balance of the loan.

A

simple interest

75
Q

to calculate simple interest, you must use an amortization…

A

schedule.

76
Q

one of the most expensive interest methods on installment loans is the…

A

add-on method.

77
Q

the amount added onto the loan = loan amount x interest rate x…

A

loan term

78
Q

an additional charge for paying off a loan before the maturity date.

A

prepayment penalties

79
Q

a method used for prepayment penalties that charges more in the earlier months.

A

Rules of 78s (sum-of-the-digits method)

80
Q

if it costs more to borrow money than you can earn in interest, then you should withdraw money from your…

A

savings to pay cash for the purchase.

81
Q

if is better to use your savings instead of borrowing to make a purchase when the cost of borrowing is much greater than the interest earned on savings.

A

true

82
Q

a loan rollover means that the loan is paid off by taking out…

A

another loan

83
Q

credit unions often have the most favorable terms for…

A

borrowers.

84
Q

when comparing 2 installment loans w/ the same principal and APR, the loan with the longer maturity will have the lower monthly payment and the higher…

A

cost.

85
Q

the APR on a single-payment loan of $1,000 at a simple interest rate of 12% is…

A

12%.

86
Q

mason corporation borrows funds for the expansion of its business. the loan is secured with the office building. therefore, the office building serves as collateral for the loan.

A

true

87
Q

a single-payment loan is advantageous to a borrower only if funds are expected to be available in the future to repay the loan in a what?

A

lump sum

88
Q

interest paid on a home equity loan is tax…

A

deductible.

89
Q

the rate of interest charged on variable-rate loans changes periodically in keeping with prevailing…

A

market conditions.

90
Q

jenny’s take-home pay is $5,000, and her total monthly payments are $1,000. What is her debt safety ratio?

A

20% (1,000/5,000)

91
Q

if the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan, the amount to be disbursed to the borrower is…

A

$1,800.

92
Q

using the simple interest method would be the least expensive for the borrower when determining the total amount to be paid to the lender.

A

true

93
Q
A

Personal Finance (9 decks)

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