Chapter 7: Using Consumer Loans Flashcards
study for exam #3
a formal, negotiated contract that specifies both the terms for borrowing and the repayment schedule.
consumer loans
type of loan that is a 1-shot transaction for a specific purpose, generally, for purchasing big-ticket items.
consumer loans
no credit card or checks are issued w/ consumer loans.
true
- auto loans
- loans for other durable goods
- education loans
- personal loans
- consolidation loans
These are examples of…
consumer loans.
what percentage of the costs of a car can be financed w/ an auto loan?
80-90%
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?
auto loans
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?
loans for other durable goods
what type of consumer loan finances undergraduate or graduate studies?
education loans
what type of consumer loan is an unsecured loan for non-durable expenditures?
personal loans
what type of consumer loan is used to straighten out an unhealthy credit situation?
Consolidation loans
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.
single-payment loans
loan that is a type of interim financing.
single-payment loans
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.
installment loans
- William D Ford Federal Direct Loan Program (Direct)
- Federal Perkins Loans
- Parent Loans for Undergraduate Students (PLUS)
What are these?
student loans
a type of direct loan where the department of education pays interest while the student is in school.
subsidized loan programs
a type of direct loan where the student is responsible for all interest payments.
unsubsidized loan programs
in order to be eligible for a student loan, one must:
1. demonstrate a financial need
2. make satisfactory progress in academic program
true
how is a financial need assessed for determining eligibility for a student loan?
cost of attending school - amount student can afford to pay
when does loan repayment begin?
after school is complete
you can request:
1. extended payment
2. graduated repayment schedule
3. income-contingent repayment plan
for your…
student loans.
student loans are dischargeable in bankruptcy proceeding.
false; student loans are not dischargeable in bankruptcy proceeding.
what is the maximum student loan amount that a student should obtain based upon?
expected future salary
on consumer loans, are:
1. fixed rates
2. variable rates
more common?
- fixed rates
on longer-term installment loans, variable rates are becoming more common.
true
what do variable rates change in correlation to?
the market
- commercial banks
- consumer finance companies
- credit unions
- savings and loan associations
- sales finance companies
- life insurance companies
- friends and family
These are the 7 sources of…
consumer loans.
commercial banks offer lower interest rates than most lenders and only lend to those who are account holds w/ good credit ratings.
true
what source of consumer loans obtains funds through stockholders and open market borrowing?
consumer finance companies (small loan companies)
consumer finance companies offer consumer loans of $5,000 or less with high interest rates and collateral because they offer to higher-risk costumers.
true
consumer finance companies are governed by an…
interest-rate ceiling (usury laws).
credit unions only grant consumer loans to members for the best borrowing opportunities and low interest rates.
true
savings and loan associations offer similar interest rates on consumer loans as commercial banks.
true
sales finance companies offer consumer loans at a much higher rate, especially if the original dealer is involved in the financing process.
true
a process where merchants sell their loans to a 3rd party.
“selling paper”
the most significant sales finance company is captive…
finance companies.
what source of consumer loans offer death benefits and savings functions?
life insurance companies
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.
true
the amount of accumulated savings.
cash value
is it advisable to loan from family or friends? Why or why not?
no, because it is a last resort
- How does the transaction fit into my financial plans?
- How do the required debt payments on the loan fit into my monthly cash budget?
These are the questions you should ask when…
choosing the type of credit that is most suitable for you
- finance charges
- loan maturity
- total cost of transaction
- collateral
- payment date
- prompt and convenient obtainment of loan
- late payment charges
- prepayment penalties or refunds
These are the 8 factors of…
consumer loans that should be considered to determine their suitability to a borrower.
effective interest rate and any potential fixed or variable rates.
finance charges
stated cost of money and any additional fees required on the loan.
annual percentage rate (APR)
make sure the size and number of loan payments will fit into your spending and savings plans.
true
what do you do to lower loan costs?
shorten maturity period
what do you do to produce more affordable monthly loan payments?
lengthen loan maturity period
the price of the item + the price of the credit =
the total cost of the transaction.
to calculate the cost of a transaction, add the amount put down on the purchase to the total of all monthly loan payments.
true
consumer loans with collateral, typically, have lower…
interest rates.
how much may interest rates be lowered for loans w/ collateral?
up to 0.5%
you should only obtain a consumer loan if the loan has the desired effects on financial…
condition.
take periodic inventory of outstanding consumer debt every…
3-4 months or, at least once per year
what is an ideal debt safety ratio under?
10% or lower
how must single-payment loans be paid?
with 1 payments that consists of both interest and principal on the due date
single-payment loans are useful when funds are temporarily unavailable, but expected in the future.
ture
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.
loan application
lenders usually choose items are collateral that are readily marketable at a high enough price to cover the…
principal of the loan.
a legal claim that permits lenders to liquidate collateral to satisfy the loan if the borrower defaults.
lien
instrument that gives lenders title to moveable property in the event of default.
chattel mortgage
agreement giving lenders the right to sell collateral in case of default.
collateral note
maturity on single-payment loans are usually within…
1 year or less.
a set percentage of interest that would have been paid over the remaining life of the loan.
prepayment penalty
a prepayment penalty must be disclosed in accordance with what act?
the Truth in Lending Act
when original loan is paid off by taking out another loan.
loan rollover
how many times can you receive a loan rollover?
no more that 2 times as an absolute max
a statement that discloses the interest costs and any other fees added into the loan.
loan disclosure statement
what are the 2 methods of calculating interest?
- simple interest method
- discount method
what interest method is charged only on the actual loan balance outstanding?
simple interest method
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?
discount method
loan amount x interest rate x loan term =
simple interest AND discount
annual percentage rate = average annual finance charge / average loan balance outstanding
true
installment loan maturity takes anywhere from 6 months to 7-15 years.
true
loans secured by a 2nd mortgage on a house.
home equity loan
interest only charged on the outstanding balance of the loan.
simple interest
to calculate simple interest, you must use an amortization…
schedule.
one of the most expensive interest methods on installment loans is the…
add-on method.
the amount added onto the loan = loan amount x interest rate x…
loan term
an additional charge for paying off a loan before the maturity date.
prepayment penalties
a method used for prepayment penalties that charges more in the earlier months.
Rules of 78s (sum-of-the-digits method)
if it costs more to borrow money than you can earn in interest, then you should withdraw money from your…
savings to pay cash for the purchase.
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.
true
a loan rollover means that the loan is paid off by taking out…
another loan
credit unions often have the most favorable terms for…
borrowers.
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…
cost.
the APR on a single-payment loan of $1,000 at a simple interest rate of 12% is…
12%.
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.
true
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?
lump sum
interest paid on a home equity loan is tax…
deductible.
the rate of interest charged on variable-rate loans changes periodically in keeping with prevailing…
market conditions.
jenny’s take-home pay is $5,000, and her total monthly payments are $1,000. What is her debt safety ratio?
20% (1,000/5,000)
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…
$1,800.
using the simple interest method would be the least expensive for the borrower when determining the total amount to be paid to the lender.
true
