Ch.7 Using Consumer Loans
Ch7 Discount method formula
Finance charge (discount method)= amount of loan * interest rate * term of loan. What differentiates this method from the simple interest is before performing final calculation you subtract the finance charge from the sum from the average loan balance outstanding then you can add the numerator and perform the calculation. 5
Consolidation loans
This is a type of loans that is intended to be used to get you out of an unhealthy credit situation. This may help your deteriorating credit situation. Very expensive and risky* don't use!
Ch.7 What are the characteristics of life insurance policy cash value loans?
You are borrowing from yourself. Life insurance companies are required by law to make loans against the cash value of certain types of life insurance policies. The rate of interest is stated in the policy and usually carries a variable rate that goes up and down with prevailing market conditions. These do not have repayment dates. The amount of the loan outstanding, plus any accrued interest, is deducted from the amount of coverage provided by the policy. Insurers put borrowed accounts in a lesser category based on the diminishing cash value on the account.
Ch7 the most expensive method of calculating interest I have covered and seen examples for is called?
add-on interest
Which of the sources of credit offer lowest rates?
banks
common sources of consumer credit include (8)
banks, consumer finance companies, credit unions, savings & loan associations, sales finance companies, life insurance companies, brokerage firms, and friends/relatives
CAL (College Access Loan) details
borrow up to cost of attendance minus any financial aid, 2016 interest rate: 4.50% fixed, repayment schedule up to 10-20yrs. starts 6months after graduation.
Perkins loans details
campus-based meaning the school selects recipients, low interest rate, annual and lifetime loan limits apply, each school determines the maximum available amount, repayment can be deferred and then repaid over a ten year period, borrowers who are employed in certain public or military teaching service can have balance waived
which of the sources of credit charge the most?
consumer finance companies
Lien
legal right given to owners and borrowers to collect collateral if payments are not met.
Ch7 Rule of 78s how it works..
lenders front load an inordinate amount of interest to the early months of the loan which take away from the principle repayment.
chattel mortgage
secured loan where borrower maintains possession of or title to the item(s).
collateral note
secured loan where lender maintains possession of or title to the item(s). Also gives the right to the lender to sell collateral if the borrower defaults on the obligation.
Ch.7 two basic methods use to calculate single payment loans are?
simple interest method and the discount method.
Ch.7 What are the limitations of Stafford Loans? who's borrowing; interest rate; borrowing limits; loan fees; loan term
student is borrowing; 4.29% for undergraduate and 5.84% graduate/professional; $23K for dependent and independent undergrad...$138.5K for Grad/professional with a max of $65K in subsidized loans and $224K for medical school and health professions; 1.073% loan origination fee; 10 year loan term.
Stafford loan details
subsidized or unsubsidized, making satisfactory academic progress, repayment 10- 25years (deferred until after graduation; can consolidated multiple loans), cannot be discharged by bankruptcy,
Ch.7 Purpose of sales finance companies is to...
support the sales of products. how it works: dealer provides installment financing to their consumer. a sales finance company then purchases the loan from the merchant; an act called "selling paper." consumers then are sending their payments to the third party that purchased the "paper." Captive finance companies are those owned by the manufacturers of big ticket items.
Basic consumer loan features
term (number of payments), maturity, single payment or installment, secured or unsecured, if secured-chattel mortgage or collateral note.
Ch.7 Cash value (of life insurance) definition
the accumulation of savings in an insurance policy that can be used as a source of loan collateral.
Ch7 How is the cost of credit/disability insurance accounted for with an installment note?
the cost is accounted for by agreeing that the lender will receive repayment in the event of death/disability of the borrower.
Parent loans (PLUS) details...also GradPLUS
these loans are for the parents/guardians of students, interest rates are subsidized by the government, can borrow up to full cost of education for dependent child, current interest rate2016-17 6.31%. GradPLUS- current rate 6.84% with a 4.272% origination fee deducted when loan is disbursed.
Ch.7 Author: The most common use for consumer loans
used to buy an automobile
Ch. 7 interest vs. 0% APR
0% APR; as a consumer you will pay less if you don't have to accumulate interest.
Ch7 Process of calculating APR for add-on interest. 1, 2, and 3. Calculated on original loan balance
1 find financial charge= amount of loan * interest rate * term of loan 2 find monthly payment= (amount of loan + finance charge) / number of payments 3 calculate APR with keystrokes N, PV, and PMT
Ch7 Buy on time or pay cash?
If it costs more to borrow the money than you can earn interest, the withdraw the money from your savings to pay cash for the purchase; if not, you should consider taking out a loan.
Ch.7 lien
legal claim that allows creditors to liquidate loan collateral.
ch.7 collateral note
loan document clause that gives lender legal recourse in collecting a debt.
Personal loans
loans that are typically used for non-durable expenditures like a European vacation. *Unsecured loan--which means there is no collateral other than the borrowers good name.
Education loans
loans to better yourself
Auto-loans
loans used to buy a vehicle. The *collateral will often be the vehicle should you stop making payments.
Ch7 What source has the most expensive loans?
most likely a consumer finance company. additionally, consolidation loans are a very risky TYPE of loan.
Ch.7 Add-on interest formula
Finance charge (add-on method)= amount of loan * Interest rate * term of loan
Ch.7 What are the limitations of PLUS loans. borrower; interest rate; cumulative borrower limits (undergrad and grad/prof.); loan fees; loan term.
Parent borrower; 7.21% interest rate; no total dollar amount. It is the cost of attendance minus any other financial aid received; 4.272% of loan amount loan fee; 10 year loan term.
Identify types of federally sponsored student loan programs
Stafford loans (FFELs), Perkins loans, College Access Loan (CAL), Parent loans (PLUS),
Ch.7 What are the limitations of Perkins Loans: borrower; interest rate; cumulative borrower limits (undergrad and grad/prof.); loan fees; loan term.
Student borrower; 5% interest rate; $27.5K undergrad and $60K grad/prof.; no loan fees; 10 year loan term.
Loans for other durable goods
TV's, home computers, small airplanes, mobile homes.
Ch7 Rule of 78s (sum-of-the-digits method) definition.
a method of calculating interest that has extra-heavy interest charges in the early months of the loan.
Ch.7 Where are the highest rate installment loans usually found at?
Consumer finance companies. They offer secured and unsecured loans. The rates are so high that they are regulated by usury laws that set ceilings for the amount these companies can give.
Ch.7 APR formula
APR= Average annual finance charge / Average loan balance outstanding
Ch7 Calculating APR on simple interest loan
APR= Average annual finance charge / average loan balance outstanding.
Ch.7 Calculate APR- $10,000 loan; 8% interest; for 2 years
APR= [(8% * $10,000 * 2)/2] / $10,000 Answer= $800/$10,000= 8%
Ch.7 Student loans; amount that can be borrowed is limited or unlimited?
Amount borrowed is LIMITED..
List the five major reasons for borrowing money through a consumer loan
Auto-loans, loans for other durable goods, education loans, personal loans, and consolidation loans.
Ch.7 0% APR vs. Rebate
Choosing the rebate will almost always turn out better. see p.274 for example.
Ch.7 Source of low-rate automobile financing.
Commercial banks*
Ch.7 Type of consumer loan for those heavily in debt.
Consolidation loan
Stafford loan borrowing limits (dependent undergrad, independent undergrad, and graduate professional)
Dependent- $31,00 total; Independent- $57,000 total; Graduate- $138,500 total (224,000 for health professionals)
Ch.7 Installment loan; simple interest method.
Interest is calculated on the outstanding balance each period. *use FVM formula in calculator for this form of simple interest..
Ch7 What type of penalty is the rule of 78s?
It is a prepayment penalty that can be issued if you decide to pay off your loan prior to maturity.
Ch7 Calculating monthly payment with add-on interest. Formula
Monthly payment= (amount of loan + finance charges) /number of payments.