Module 15 - Types of Credit

Question 1

Installment credit

Answer 1

Installment (or closed-end) credit is an arrangement in which the borrower must repay the amount owed plus interest in a specific number of equal payments. Examples of installment credit include vehicle loans and mortgages.

Question 2

Non-installment credit

Answer 2

an arrangement in which credit is extended in advance of any transaction so that borrowers do not need to reapply each time they need to use credit. Borrowers can use an open-ended credit account as long as their current balance is less than their credit limit, which is the maximum outstanding debt that a lender will allow on an open-ended credit account. Examples of non-installment credit include credit cards and personal lines of credit. Credit cards can be further classified as bank credit cards or retail credit cards.

Question 3

Methods for How Interest is applied

Answer 3

1. Add on method- interest is distributed evenly over the payment
2. Simple interest method -
   With the simple-interest (or declining-balance) method, the portion of each payment that is applied to interest gets smaller over time. In comparison, the amount applied to principal gets larger over time. The payment amount remains the same.

Question 4

Amortization

Answer 4

the regular installment loan payment is divided into two parts, repayment of principal and payment of interest. The amount applied toward principal increases over time, while the amount applied to interest charges decreases.

Question 5

prepayment penalty

Answer 5

This means that if they pay more than the required payment, they will be charged a fee.

Question 6

acceleration clause

Answer 6

If a loan has an acceleration clause and a payment is missed, the borrower is considered to be in default and the remainder of the payments are due in full immediately to the lender

Question 7

interest

Answer 7

interest is the cost of credit (a percentage of the amount borrowed

Question 8

APR - annual percentage rate

Answer 8

the cost of credit on an yearly basis

Question 9

Variable interest rate

Answer 9

tied to another interest rate and usually moves with the economy. a certain number of percentage points above the index rate. Credit card issuers do not have to send you an advance notice when your variable interest rate goes up because the underlying rate has gone up, so you will not know if your interest rate has changed unless you pay attention to your credit card billing statement. If your credit card issuer increases the margin portion of your variable interest rate (the difference between the variable interest rate and the index rate), the fixed interest rate increase rules apply. In that case, your card issuer will be required to notify you in advance of the change, giving you the chance to opt out.

Question 10

Fees charged for credit cards

Answer 10

1. annual fee
2. transaction fee - examples are cash advance or balance transfer fee

Question 11

Transaction date

Answer 11

Date of purchase

Question 12

Billing date

Answer 12

also referred to as the statement date or close date -is the last day of the month that transactions are included on the bill. Each credit card runs on a billing cycle.

Question 13

Due date

Answer 13

When the company expects to receive payment

Question 14

When must companies send out statements

Answer 14

at least 14 days before payment is due

Question 15

Grace period on credit card

Answer 15

interest is not accrued unless the credit card payment for that transaction is late. Some companies waive the grace period if payments are not made in full.

Question 16

Government Education student loans

Answer 16

Direct loans made through the William D Ford Federal Direct Loan - FDLP

Question 17

FFLEP and Perkins Loan

Answer 17

Neither offered anymore

Question 18

Types of Student loans

Answer 18

Federal subsidized and Federal Direct unsubsidized loans

Question 19

Federal direct subsidized loans

Answer 19

accrue no interest while students are enrolled in school at least half-time, during their grace period and in deferment - unless student is at 150% of the length of their program of study

Question 20

Federal Direct Unsubsidized Loans

Answer 20

1. for students who don’t meet subsidy needs
2. Parent Plus
3. Graduate Plus
   Interest accrues on loans when they are made and keeps accruing until they are paid in full

Question 21

Federal Direct Consolidation Loans

Answer 21

FDLP Consolidation Loans are available to replace other federal student loan debts — but not non-federal debts — with one loan, one monthly payment, and one loan servicer chosen by the borrower. These loans often offer longer repayment periods.

Question 22

Primary source for federal student loans

Answer 22

Department of Education website

Question 23

Student loan repayment plans

Answer 23

1. Standard
2. Graduated
3. Extended
4. Income-driven

Question 24

Income driven repayment plan options

Answer 24

1. Revised Pay as You Earn Repayment Plan
2. Pay As You Earn Repayment Plan
3. Income-Based Repayment Plan
4. Income-Contingent Repayment Plan
5. Income-Sensitive Repayment Plan

based on their adjusted gross incomes (AGI)

Question 25

Special repayment considerations

Answer 25

1. Deferment
2. Forbearance - can’t make payments and don’t qualify for deferment- interest. continues to accrue during forbearance.
   payments can stop for up to 12 months or payment can be reduced

Question 26

Types of forbearance

Answer 26

1. Discretionary -suffering a financial hardship or illness
2. Mandatory -borrowers who meet 6 sets of criteria including, but not limited to, service in medical or dental internships or residency programs, serving in positions for which they received national service awards, performing service to qualify for teacher loan forgiveness, and certain types of National Guard service.

Question 27

When is a student loan borrower in default?

Answer 27

After 270 days of no payments or when they don’t meet other terms of the promissory note