Types of Credit Fin Lit 9A/B Flashcards
Define Loan
A sum of money borrowed that is expected to be paid back with interest.
Loans can be used for various purposes, including buying a home, financing education, or covering personal expenses.
What is Principal?
The original sum of money borrowed or invested, excluding any interest or additional fees.
The principal is the amount on which interest is calculated.
Define Interest.
The cost of borrowing money, usually expressed as a percentage of the principal.
Interest can be fixed or variable and is typically paid periodically.
What is Term?
The duration over which a loan is to be repaid.
Terms can vary significantly depending on the type of loan.
Define Secured loan.
A loan backed by collateral to reduce the risk associated with lending.
If the borrower defaults, the lender can claim the collateral.
What is Unsecured loan?
A loan that is not backed by collateral and is based solely on the borrower’s creditworthiness.
Examples include personal loans and credit cards.
Define Collateral.
An asset that a borrower offers to a lender to secure a loan.
Common forms of collateral include real estate, vehicles, or savings accounts.
What is Credit?
The ability to borrow money or access goods or services with the understanding that payment will be made in the future.
Good credit is essential for obtaining loans and favorable interest rates.
Define Co-signer.
A person who agrees to take responsibility for a loan if the primary borrower fails to pay.
Co-signers typically have good credit and help borrowers qualify for loans.
What is a Variable rate loan?
A loan with an interest rate that can change over time based on market conditions.
This can lead to fluctuating monthly payments.
Define Credit Card.
A plastic card issued by a financial institution that allows the holder to borrow funds to pay for goods and services.
Credit cards usually come with a credit limit and require monthly payments.
What is Credit Score?
A numerical representation of a borrower’s creditworthiness.
Credit scores are used by lenders to assess the risk of lending money.
Define Schumer Box.
A standardized table that discloses the terms and costs of a credit card.
It includes information like interest rates and fees.
What is Annual Percentage Rate (APR)?
The annual rate charged for borrowing, expressed as a percentage of the loan amount.
APR includes interest and any applicable fees.
Define Billing Cycle.
The period between the last statement and the current statement on a credit card account.
It typically lasts about 30 days.
What are Penalty Fees?
Fees charged for violating the terms of a credit agreement, such as late payments.
Penalty fees can significantly increase the cost of borrowing.
Define Credit Card Statement.
A monthly summary of transactions, payments, and fees on a credit card account.
It also shows the minimum payment due and the due date.
What is Minimum Payment?
The smallest amount a borrower can pay on a credit card bill to avoid penalties.
Paying only the minimum can lead to long-term debt.
Define Late Payment.
A payment made after the due date specified by the lender.
Late payments can incur fees and negatively impact credit scores.
What is Cash Advance?
A service that allows credit card holders to withdraw cash against their credit limit.
Cash advances often come with higher interest rates and fees.
Define Balance Transfer.
The process of moving debt from one credit card to another, usually to take advantage of lower interest rates.
Balance transfers can help manage debt more effectively.
What is Credit Utilization Rate?
The ratio of a borrower’s total credit card balances to their total credit limits.
A lower credit utilization rate is generally better for credit scores.
Define Amortization.
The process of paying off a loan over time through regular payments that cover both principal and interest.
Amortization schedules outline how much of each payment goes toward principal and interest.
What is Down Payment?
An upfront payment made when purchasing an expensive item, such as a home, to reduce the loan amount.
Down payments are often expressed as a percentage of the purchase price.
Define Leasing.
A contractual arrangement where one party pays for the use of an asset owned by another party.
Leasing is common for vehicles and equipment.
What is Rebate?
A partial refund to someone who has paid too much for tax, rent, insurance, or a utility.
Rebates are often used as incentives in marketing.
Define Mortgage.
A loan specifically used to purchase real estate, secured by the property itself.
Mortgages are typically long-term loans with fixed or variable interest rates.
What is a Fixed Rate Mortgage?
A mortgage with an interest rate that remains constant throughout the life of the loan.
This provides predictable monthly payments.
Define Adjustable Rate Mortgage (ARM).
A mortgage with an interest rate that may change periodically based on changes in a corresponding financial index.
ARMs often start with lower initial rates that can increase over time.
What is a Payday Loan?
A short-term, high-interest loan typically due on the borrower’s next payday.
Payday loans can lead to a cycle of debt due to high fees.
Define Predatory Lending.
The practice of lenders using deceptive, unfair, or fraudulent practices to entice borrowers into high-cost loans.
This often targets vulnerable consumers who may not fully understand the terms.
