Consumers Chapter 6

List 3 ways you could DECREASE the total amount of money you pay for your mortgage.

-Larger down payment -Larger monthly payments -Lower interest rate or purchase price of home

Why is it important to understand each criteria? Annual fee APR Penalty fee and rates Grace period

Annual fee: You want to know if you have to pay a fee every year. The fee could be greater than the amount of rewards earned. APR: You want to know what interest charges you will have to pay if you don't pay the full balance on time. Penalty fee and rates: You want to know what charges you will have to pay if you are late with a payment. Grace period: You want to know how many days you have to pay off your balance without being charged interest..

What is the main difference between transaction fees and an annual fee on your credit card?

Annual fees are a fixed, stated amount, whereas transaction fees depend on your individual usage

Explain why Joe's $200,00 home actually costs $360,000?

As Joe continues to make his monthly payments, the unpaid loan collects interest that will accumulate to $160,000 after he makes his final payment after 25 years.

List two reasons someone would want access to credit.

Buying something very large, like college education or house, that they cannot afford to pay in full right away Want line of credit as a backup plan, in case they have an unexpected expense they cannot pay for Want to use credit card for points, rewards, etc {Many others exist, but unclear students would know them after just one lesson -- would rely on prior knowledge}

How do you avoid paying credit card fees?

By paying off the full unpaid balance on time every month AND understanding the fine print of a Credit Agreement/Schumer's Box for all the fees that could be assessed by using a specific credit card.

What are some major differences between credit & debit you must understand?

Credit cards are money borrowed for purchases and may result in interest charges while debit cards only draw on money you already have in your checking account.

How are credit cards similar or different than debit cards?

Credit cards involve purchases made with borrowed money. You don't necessarily need to have the money to use a credit card. Credit cards have a spending limit while debit cards allow you to spend as much as you have in your account. Credit cards charge interest (for money borrowed) while debit cards are sometimes linked to interest-earning checking accounts.

You go to the ATM to take out cash for a cash only restaurant. Should you use your credit card or your debit card? Briefly give one reason why.

Debit card- cash advances on your credit card are associated with fees, they have high interest rates, no grace periods

List two examples of items that could be used as collateral for a secured loan.

House or car

Which seems like the better option - deal financing vs direct lending?

I think direct lending is better if there are no incentive programs offered by the dealership because I can shop around for the best interest rate, regardless of the type of car I want to buy. If there was a major incentive, then I may prefer dealer financing.

Why do most people need a mortgage to buy a home?

Most people do not have the required capital to become a homeowner without the help of a loan.

What do people use loans for? When is it good to use a loan?

People use loans when they need money to purchase something they cannot currently pay for like buy a car or buy a house. It is good to use a loan for purchases that really are needs, for example buying a car with a loan so you can go to work would be a good reason.

What happens to the principal portion and interest portion of the monthly payment on a loan over time?

Principal increases, interest decreases

Define principal, interest & term

Principal: amount you are borrowing Interest: percentage you are being charged for the right to borrow the money Term: the amount over which you pay back your principal and interest

Describe how a secured loan is different from an unsecured loan.

Secured loan has an item that can be reclaimed by the lender if the borrower does not make payments. For example, repossess your car or foreclose on your home if you don't make payments. Unsecured, like credit cards or college loans, don't have a THING the lender can retrieve if you don't pay.

What are the main advantages of a secured and unsecured loan?

Secured: requires collateral which the lender can take but offers lower interest rates Unsecured; does not require collateral but is more risky and therefore comes with higher rates

What is similar and different between using dealer financing versus direct lending to pay for a car?

Similarities: -You agree to pay over a period of time the amount financed plus a finance charge Differences: -Direct lending comes from a bank, finance company, or a credit union while dealership financing comes from a car company -Direct lending may offer you: a chance to shop around and ask several lenders to know your credit terms in advance -Dealership financing may offer you: -Convenience - Dealerships may have longer hours Multiple financing options - Dealers have relationships with a variety of banks and finance companies -Special offers - There might be manufacturer-sponsored incentive programs

The larger your down payment amount, the ____________ (larger/smaller) the loan amount, and ______________ (larger/smaller) your monthly car payments.

Smaller, smaller

What factors determine the interest rate that will be charged for money borrowed when using credit

Some factors include the credit score (higher score means lower rates), the loan (the more you borrow and the longer you borrow, the higher the rate), good employment history, being debt free (lower rates), having a good relationship with the institution.

Which of these words refers to the length of time you have to pay off an installment loan?

Term

Why does the amount of INTEREST you owe decrease every month?

The amount of interest you owe decreases every month because the outstanding balance (principal) is less.

What happens if, for whatever reason, you miss a payment on your car loan?

The car will be repossessed and your credit score will lower. This is because a car loan is a secured loan with the car as collateral.

What happens to the principal paid over time?

The principal decreases as it is paid over time. Making extra principal payments will get your loan paid off sooner but will not change future monthly payment amount obligations.

What is a danger of taking a variable rate loan?

Variable-rate loans increase or decrease based on the current interest rate environment. Your interest charges and monthly payments could go higher or lower depending on the change in interest rates.

At the start of an amortized loan, the bulk of your monthly payment goes towards the _________. On the other hand, as you get closer to the end of the loan term, the bulk of your monthly payment goes towards the __________.

interest, principal

When loan payments are amortized, the total amount you owe every month _________________.

is the same

Which types of credit involve repaying a fixed amount for a fixed number of months?

loans, mortgages

When borrowing money through an auto loan, it is better to have a __________ (higher/lower) interest rate. The higher your credit score is, the ________________ (higher/lower) your APR, or interest rate.

lower, lower

You [should/should not] tell the dealer the maximum you can pay per month

should not

What is a cosigner and what considerations should they make before co-signing a loan?

A co-signer is someone who agrees to take on the responsibility of repayment if the loan goes unpaid. They should consider that their credit score will be negatively affected if their cosigner doesn't pay their loan.

What is the difference between a fixed and variable rate mortgage?

A fixed rate mortgage is predictable because the interest rate is set at the beginning and therefore doesn't change with the short term interest rate. On the other hand, the variable rate mortgage is pegged to the short term interest rate. Lenders typically offer lower initial rates on variable rate mortgages.

What are some of the advantages and disadvantages to having and using a credit card?

Advantages: Establishing credit Pay for items you can't afford immediately Rewards/Cash back Disadvantages: Encourages you to spend money you don't already have Interest is higher than other types of loans Credit cards come with several fees

Name at least 2 things all types of credit have in common?

All types of credit require paying more than you originally spent, all have limits on how much you can take out and borrow, and all have attached fees

Debit card: what is it?, Pros, Limitations Credit card; what is it?, Pros, Limitations

Debit card: What is it?: Card that connects to your checking account that allows you to make purchases and withdraw from ATMs Pros: low fees, usually FDIC protected, Linked to checking account, Used to take cash out of ATMs Limitations: can only spend the amount in your bank account Credit card: What is it?: Allows you to spend money you don't already have. You may have to pay interest and fees on purchases but you may get rewards when you use the card for purchases Pros: Rewards, Credit limit for purchases, Best for responsible users, Build credit file Limitations: Risk of ID theft, cause people to overspend, high interest rates

If your uncle said, "Take it from me! I've been swimming in credit card debt for a decade. Whatever you do, don't open a credit card!" what would be your response?

It's not that credit is a bad idea -- you just have to use it responsibly. That's a good point -- if I do open credit, I'll make sure I don't run up large debts, because 10 years is a long time to pay it off! But, I can see positive sides of opening a credit card account -- emergencies, to build my credit, etc.

Explain how Joe has a $175,000 mortgage on a home that is selling for $200,000.

Joe had $25,000 which he used as a down payment. This means that he only needs to borrow $175,000 from the bank.

What are the different fees that you know that credit card companies charge borrowers?

Late payment fees, Interest charges, Transaction fees, Foreign Transaction fees, Annual fee, Penalty fee, Interest on cash advances/balance transfers, etc.

How is an amortized loan different from a simple interest rate loan?

With an amortized loan, you are spreading out the principal and interest payments over the term of the loan.

Do you think it's a good idea for high school students to have a credit card?

Yes, I think giving a credit card with very low credit limits would help high school students understand the implications and responsibilities of credit. They would also begin to build their credit file and establish a credit history.

What about college students? Adults? Explain why you feel this way.

Yes, it is imperative that responsible college students and adults use a credit card to earn rewards and build a credit file, so they can have access to credit in the future (to buy a home, cars, start a business, apply for jobs, etc.).

If your car loan suddenly becomes too expensive, what is one thing you SHOULD do and one thing you SHOULD NOT do?

You SHOULD keep making your monthly payments and you SHOULD NOT pay third party car financing companies.

You should shop around for a loan preapproval from a direct lender before going to the dealer because ___________________________________________

You will have leverage when negotiating at the car dealership because you know what interest rate you deserve.

Which types of credit involve repaying different amounts each month, depending on your activity?

credit cards, overdraft fees

The shorter your term length, the ______ (higher/lower) your monthly payments, and the _______ (higher/lower) the total interest you will pay.

higher, lower