Personal finance chapter 7
Bob Shockey borrowed $25,000 from his $250,000 cash value life insurance policy to send his daughter to private college. Assuming he pays interest as it accrues, if Bob dies before the debt is repaid his beneficiary will receive
$225,000
Credit unions grant loans only to members of the credit union.
True
From a financial planning perspective when considering a consumer loan, you should ask yourself how the purchase fits into long-term financial plans.
True
Loans against a life insurance policy do not have to be paid back.
True
When comparing two installment loans with the same principal and APR, the loan with the longer maturity will have the lower monthly payment and the higher total costs.
True
When you take out a loan against the cash value of your life insurance policy, you're really borrowing from yourself.
True
A loan against the cash value of your life insurance policy would be characterized by
no specific repayment date
The most popular use of consumer loans is to
purchase a car
Annual percentage rate is equivalent to
simple interest method
Sometimes it may be better to use savings rather than credit to make a purchase. This would be recommended when
the cost of borrowing is greater than the interest earned on the savings.
Commercial banks generally charge lower interest rates than other lending institutions because
they get their funds in the open credit market.
Earnings on 529 college savings plans can be tax free when used for qualifying college education expenses.
true
GMAC is an example of a captive finance company.
true
In order to continue receiving student loans, the student must be making satisfactory progress in his academic program.
true
The most common use of consumer loans is to purchase automobiles.
true
The student loans with the best loan terms are the Stafford and Perkins loans.
true
Variable-rate loans are desirable if interest rates are expected to fall in the future
true
A single-payment loan
usually matures in one year or less.
If your installment loan has a variable interest rate,
you cannot accurately predict the total interest you will pay on the loan.
Which of the following are recommended if you loan money to a friend or relative?
-Do it in a business-like fashion. -Charge interest if the loan is not to be quickly repaid. -Be sure both parties understand it is a loan, not a gift. -Lend only money you can afford to give away.
Besides the finance charge, you should also consider ____ when you shop for a consumer loan.
-loan maturity -total cost of the loan -collateral requirements -prepayment penalties
When credit life or disability insurance protection is required as a condition of a loan, the cost
-must be added to the finance charge. -must be included in the APR calculation.
Home equity loans are similar to other installment loans except
-the interest paid is generally tax deductible. -your home is used as collateral.
The annual percentage rate (APR) on a single-payment loan for $1,000 at a simple interest rate of 12% is
12%
Installment loans are typically repaid in monthly payments.
True
Student loans are made by banks and other financial institutions, but students apply for these loans through their universities.
True
The average graduating college senior leaves school with about _______ in debt.
$30,000
The monthly payment on an 8%, 36-month, add-on loan for $10,000 would be
$344
The repayment period on most installment loans is six to twelve months.
False
If a loan has a prepayment penalty, there will be an additional cost to repay the loan early.
True
If the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan, the amount to be repaid is $1,900.80.
True
It is becoming increasingly frequent for longer-term installment loans to carry variable interest rates.
True
Life insurance loans could involve a tax penalty if certain conditions are not met.
True
Sales finance companies commonly purchase the retail installment contracts of businesses that sell big-ticket items such as automobiles, furniture, and appliances.
True
Single-payment loans are often used as a form of interim financing.
True
Student loans are not dischargeable in Chapter 13 bankruptcy proceedings.
True
The interest rate on a loan against your life insurance policy is set at the time the policy is taken out.
True
The lender can adjust the rate on variable-rate loans only on prespecified adjustment dates.
True
When simple interest is used, the stated rate of interest on single payment loans is equal to the annual percentage rate (APR).
True
When the market interest rate goes up, the rate on variable-rate loans goes up.
True
Consolidation loans are used to purchase new furniture and appliances when many items are needed at the same time.
false
A single-payment loan is advantageous only if
funds will be available to repay the lump sum.
Installment loans using the simple interest method
have interest charged only on the monthly loan balance.
A legal claim that allows creditors to liquidate loan collateral is a
lien
Credit unions lend money to qualified people who are
members
Purchasing credit life or disability insurance protection is usually
very costly
The majority of consumer loans are set up with fixed interest rates.
True
The primary type of loan made by a savings and loan association is the long-term installment loan used for the purchase of a home.
True
Most loans made by consumer finance companies are for larger amounts and are made to low-risk borrowers.
False
S&L associations are not allowed to make loans for things like cars, televisions, and appliances.
False
The majority of loans made by savings and loan associations are ____ loans.
Mortgage
If you needed a loan to buy furniture, the lowest interest rate would usually be available from a
Credit union
Which type of educational loan most likely carries the highest interest charges?
PLUS loan
Consumers whose debt burden has become very heavy might apply for a(n)
consolidation loan
To qualify for a Stafford loan, you must
-demonstrate financial need. -make satisfactory academic progress.
Which of the following are recommended if you loan money to a friend or relative?
Put the agreement in writing.
Long-term financial goals often depend on borrowing funds. The type of loan that generally does not fulfill the long-term goal achievement is ____ loans.
Single-payment
____ loans do not have to be repaid until after you graduate from college.
Stafford and Perkins
Regarding student loans, which of the following is true?
There is a limit on how much can be borrowed with each loan.
Regarding student loans, which of the following is NOT true?
There is no limit on how much can be borrowed with each loan.
A chattel mortgage is a legal claim that gives lenders the right to liquidate specific personal property to satisfy their claims in the event of default.
True
Borrowing to pay for a college education is a legitimate use of credit.
True
Collateral is an item of value used to secure the principal portion of a loan.
True
College costs have been escalating faster than the overall rate of inflation.
True
Commercial banks are generally more selective in granting loans than finance companies.
True
Consolidation loans are often used to help borrowers straighten out a critical financial situation.
True
When the simple-interest method is used to determine finance charges, the interest is calculated based on the
actual loan balance outstanding.
You want to borrow $1,000 at an interest rate of 10%. The most expensive method of calculating the dollar cost of the interest on this installment loan will be the
add-on method.
A characteristic of consumer loans is that they
are all of these
A consumer loan probably would not be used to
buy back-to-school clothes
Sales finance companies
buy installment loans from retailers.
To qualify for a Perkins loan, you must
demonstrate financial need.
If you borrow money with a single-payment loan and discover you cannot pay it back when it is due you should
negotiate a loan rollover
The highest interest rate installment loans are usually made by
Consumer finance companies
Which of the following loan sources is the most expensive?
Consumer finance companies
Savings and loan associations dominate the consumer loan market.
False
The add-on method is less expensive than the simple interest method when stated rates of interest are identical.
False
The average annual cost of a college education at a state school is about $33,000.
False
The most accurate method currently available for calculating the annual percentage rate (APR) on an add-on loan is the Rule of 78.
False
The purchase of credit life insurance is highly recommended by most financial planning experts.
False
The student loans with the lowest rates of interest and the best loan terms are the PLUS loans.
False
With the discount method, the finance charges are calculated and then added to the amount borrowed.
False
Generally speaking, variable-rate loans are desirable to the consumer if interest rates are expected to increase over the course of the loan.
False
If a 12-month installment loan is prepaid at the end of 6 months, one-half of the interest would be saved.
False
If the add-on method is used to calculate a finance charge of $150.80 on a $2,200 loan, the amount to be repaid is $2,200.
False
If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be disbursed to the borrower is $2,400.
False
A ____ is often a source of low-rate automobile financing on specific models of vehicles.
Captive finance company
529 Plans are the newest type of student loans.
False
About one in three student borrowers have a past due balance.
False
Because no written contract is usually required, borrowing from friends and relatives is advisable.
False
Cash value loans are available from all types of life insurance policies.
False
College costs have been escalating, but not as rapidly as the overall rate of inflation.
False
Consumer finance companies usually charge lower rates of interest than commercial banks.
False
Consumer loans, like open account credit, result from a rather informal process.
False
Credit unions dominate the consumer loan market.
False