Ch. 9 Review Questions

List some possible sources of personal loans

- Financial Institutions - Family Members or Friends - Peer-to-Peer Lending

What are some viable alternatives to payday loans?

- avoid borrowing money altogether - borrow from family/friends - obtain credit through a credit card

List the steps in buying a car

- how much money to spend on the car - what type to purchase - how to get the best price - whether to finance it or purchase it with cash - whether to buy or lease

What financial criteria should be considered? Discuss each briefly.

- how your decision affects your personal budget - adding credit card debt to car loan debt - the no-debt solution - the limited-debt solution

What information is needed to compute simple interest?

- the monthly payment - the amount of each monthly payment applied to pay interest - the amount of each monthly payment applied to pay down the loan principal - the outstanding loan balance that remains after each monthly payment

Why should you avoid payday loans as a source of funds?

- you may not have sufficient funds to cover normal purchases after covering the loan - the cost of financing is outrageous

Why is purchasing a new car online not as efficient as buying a new car at a dealership?

A dealership can anticipate your questions and arrange a test drive, while a website is more difficult to force them to meet its delivery promise to you

How does the maturity of a loan affect monthly payments? What should you consider when selecting the maturity?

A longer maturity on a loan results in lower monthly payments . However, the longer the maturity, the longer you're in debt and there is a potential you will pay more due to interest.

Explain the advantages and disadvantages of buying a new car instead of a used car.

Advantages: generally comes with a warranty, will have very few repairs in the first few years, the dealer may also offer financing at a lower interest rate (which can reduce the amount of interest you pay over the life of the loan) Disadvantage: immediate depreciation

What are the advantages and disadvantages of leasing a car?

Advantages: you do not need a substantial down payment, and you return the car to the leaser at the end of the period meaning you do not have to find a buyer. Disadvantage: you have no equity investment in the car, you are responsible for maintenance costs and will be charged for damages, you may also be charged a fee if you end the lease early, and you need more car insurance than if you pruchased a car

What does the personal loan process involve?

An application process, a loan contract, and possible cosigning.

Why do borrowers prefer home equity loans to other loans?

Borrowers prefer home equity loans because the interest rate is lower than other loans

Why may a weak economy cause the limit on your home equity line of credit to decline? Why may a strong economy cause the limit to rise?

During a weak economy, the market value of a home declines which causes the home equity value to decrease. During a strong economy, the market value rises and the debt remains the same, causing the home equity value to rise.

What information is contained in a loan repayment schedule?

Each loan repayment includes both interest owed and a portion of the principal

What happens if you default on a home equity loan?

If you default on a home equity loan, the lender can claim your home, use a portion of the proceed to pay off the mortgage, and use the remainder to cover your home equity loan

How can borrowers enjoy tax savings by using a home equity loan?

Interest that is paid on a home equity loan of up to $100,000 is tax-deductible. Borrowers can therefore reduce their taxes.

Do all loans have collateral? What is the relationship between collateral and interests?

Not all loans have collateral, secured loans have collateral while unsecured loans do not. In general, you will receive lower interest rates on a secured loan because the the lender has less to lose in the event that the loan is not repaid.

What is peer-to-peer lending? What are the advantages of a peer-to-peer loan?

Peer-to-Peer lending is conducted over online platforms, the funds are provided by individual investors, not financial institutions. The advantage is the lower interest rates than those that may be charged at financial institutions.

Explain the difference between a 10% rate on a payday loan and a 10% rate charged by a bank on a personal loan.

Personal loans are based on APR standards and payday loans are not

Describe some techniques that car salespeople might use in negotiating the price of the car. What should you be aware of at "no haggle" dealerships?

Salespeople "discuss" the price with the sales manager or offer "free" features, like a DVD system, leather seats, etc. When buying from No-Haggle dealerships, make sure they are selling the car at a price similar to the prices of other dealerships.

Discuss the two ways financial institutions might define equity to set credit limits.

Simple Home Equity Loan: you receive the amount you are borrowing in a lump sum with a fixed interest rate Home Equity Line of Credit (HELOC): the lender provides you with a line of credit that you can draw against over a period of time, such as 10 years. There is a credit limit and a variable interest rate

Why are loan payments under the simple interest method usually lower than loan payments under the add-on interest method?

Simple interest payments are usually lower than add-on interest payments because the add-on interest payment is not reduced over time as you pay off the loan.

What should be the first step in financing a purchase of a car? Aside for the interest rate, what two factors will have the largest impact on the size of the monthly payments?

The first step in financing a car should be estimating the monthly payment. Aside from interest rates, the amount you borrowed and the maturity will impact the monthly payments.

Who extends student loans? What are the characteristics of student loans?

Student loans are provided by the U.S. government and by private institutions. A student loan differs from a regular loan because you do not have to start repaying the loan until you are out of school.

What type of information is contained in the Buyers Guide?

The Buyers Guide must... - state whether the Dealer is selling the vehicle AS-IS or with a Warranty - inform the customer that written information overrides any spoken promises - state what percentage of repair costs the dealer will pay and the parts of the motor vehicle that are covered. - inform the customer of any parts of the motor vehicle that are not covered and how long the warranty covers any specific parts

How is the amount of the loan determined?

The amount of the loan is based on how much the lender believes you can pay back in the future

What information must borrowers supply to lenders in the loan application process? Why is this information important to the lenders?

The borrower must supply a personal balance sheet and a personal cash flow statement. Lenders use this information to determine whether you qualify for a loan and how much they are willing to give you.

What are your responsibilities if you cosign on a loan? What are the potential consequences of failing to live up to your responsibilities as a cosigner?

The cosigner is responsible for any unpaid balance if the borrower does not repay the loan. If the cosigner does not live up to the responsibilities, the lender has a right to sue the cosigner which can negatively affect credit scores.

Home Equity

The current market value of a home minus the remaining mortgage balance

Loan Contract

a contract that specifies the terms of a loan, as agreed to by the borrower and the lender

What precautions should be taken with loans from family members and friends?

When taking loans from family members or friends, always have a written agreement or contract to avoid misunderstandings and misinterpretations.

Could lenders with the same interest rates report different APRs?

Yes, lenders with the same interest rates can report different APRs because some lenders attach fees to the loans they provide

Explain when you might use a deferment on student loans. What are the disadvantages of deferring student loans?

You can use deferment on a student loan if you are unemployed. Deferment postpones the payments on the loan for a set period of time, however interest will continue to be charged during deferment

How does a prepayment penalty impact your decision to pay a loan off early?

You'll be penalized if you pay off your debt early. Typically, that charge is a percentage of your loan's total remaining balance.

Home Equity Loan

a loan where the equity in a home serves as collateral for the loan

Add-On Interest Method

a method of determining the monthly payment on a loan; involves calculating interest that must be paid on the loan amount, adding together the interest and loan principal, and dividing by the number of payments

Annual Percentage Rate (APR)

a rate that measures the finance expenses (including interest and other expenses) on a loan annually

Payday Loan

a short-term loan provided in advance of a paycheck

Collateral

assets of a borrower that back a secured loan in the event that the borrower defaults

Simple Interest

interest on a loan computed as a percentage of the existing loan amount (or principal).

Amortize

to repay the principal of a loan (the original amount loaned out) through a series of equal payments.

Maturity

with respect to a loan, the life or duration of the loan