FIN - Chapter 7 Choosing a source of credit: the costs of credit alternatives

Looking for credit, aided by internet searches, is just as important as comparison ______ for large purchases such as automobiles, furniture, or major appliances.

- Shopping

Most credit cards do not have a grace period on cash advances which means:

- You owe interest for every day until you repay the advance

It is said that the least expensive way to borrow is when you borrow on the value of a financial asset. Which of the following loans would meet that test?

- Life insurance cash surrender value loan - Certificate of deposit loan

The major provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009:

- Limits the issuer's ability to increase the interest rate in the first year - Set a consistent due date for each month - State that a teaser rate must be good for at least six months

The pros and cons of T&E credit cards, such as American Express, include:

- No finance charge is incurred as full payment of the balance is due each month - Annual fees are typically high - Full payment is due each month

The two types of credit are closed-end and free credit (TRUE/FALSE)

- FALSE

Cash advances require that you pay a transaction _____.

- Fee

Most credit cards carry a special ______, based on the percentage of the amount borrowed, that is applied when a cash advance is taken out.

- Fee

A car is repossessed by a bank. The borrower owed $4,000 on the car. At an auction, the car is sold for $3,000 and the bank incurred a $150 towing charge. How much, if anything, will the borrower owe after the sale at auction?

- $1,150, which is the unpaid loan balance and the towing charge

A simple interest declining balance loan has the following terms: 8% annual interest rate, $3,000 loan, 2 payments: one at the end of the first half year and the last payment at the end of the second half year. What would be the amount of these two payments?

- $1,620 and $1,560

On a discount loan of $2,000 with $75 interest, how much will you receive for loan proceeds?

- $1,925

If you borrow $200 and it cost you $22 in interest with a service charge of $5, what is the finance charge?

- $27

Another very expensive way to borrow is a(n) ____ refund loan, which is possibly more expensive than a cash advance on a credit card.

- Tax

Credit cards can be a cheaper alternative to an installment loan if the need is short term (less than a month). This is because of the _______ period that is often allowed by credit card companies.

- Float

Long-term financing is more costly than short-term financing becaise of higher ______ costs.

- Interest

Lender can reduce their risk by which of the following?

- Large down payment

Family members may only charge interest they would have earned on the money if they had deposited it in a ___________ account.

- Passbook

Which of the following are advantages of borrowing from a credit union?

- Patient with borrowers - Personalized service

The new Credit CARD Act requires creditors to include a warning on the monthly statement about making only the minimum ________

- Payment

Simple interest (I) is calculated as follows: ______ x Rate of Interest x Time.

- Principal

You should avoid credit when you don't need the purchase and when you can afford to pay cash to acquire the item (TRUE/FALSE)

- TRUE

Credit offered by car dealers, such as financing through _______, may be less expensive than banks, but the downside is that the car dealer may be less willing to discount the price.

- The General Motors Acceptance Corporation or Ford Motor Credit Corporation

Only about one million Americans belong to credit union (TRUE/FALSE)

- FALSE

The reason why people choose long-term financing is because it is cheaper in the long run (TRUE/FALSE)

- FALSE

A $1,000 loan that uses add-on interest has the following terms: 8%, one year, two payments: one in 6 months and one in 12 months. What is the amount of each of these payments?

- $540

What would be the interest cost (simple interest) for a $2,000 loan with a 6% rate for a Half of a year?

- $60

If you have funds available on your credit card, you can obtain a cash advance from:

- A bank or credit union - An ATM

The key piece of information that credit card issuers must provide are:

- APRs - Variable rate information - Annual fees - Grace period

Before you borrow money you should ask yourself in you need a loan, if you can _____ the loan, and if you qualify for the loan.

- Afford

Which of the following types of loans are offered by life insurance companies?

- Cash value of whole life

The three types of credit insurance are:

- Credit accident and health - Credit life - Credit property

Which of the following loans are offered by credit unions to consumers?

- Credit card loans - Installment loans - Share draft loans

Which of the following statements are true?

- Credit unions may be more willing to be patient with borrowers than other lending institutions - Cash advances can be very expensive - Micro lending organizations generally offer reasonable interest rates

If you cannot make a payment on a debt when due, contact the ______ at once to work out a modified payment plan.

- Creditors

Payday loans are ______ although readily available via check cashers, finance companies, and other sources.

- Expensive

The interest rate on cash advances is often _______ than the rate on purchases.

- Higher

The purpose of the Truth in Lending law of 1969 was to give consumers the information needed to compare credit costs on various loans (TRUE/FALSE)

- TRUE

The rule of 78s is a mathematical formula to determine how much interest has been paid at any point in a loan (TRUE/FALSE)

- TRUE

Which of the following best explains the flaw in the strategy of borrowing from a finance comapny?

- When you are denied credit from traditional sources, you probably have less ability to afford the higher rate a finance company charges.

Each 1% increase in the _____ rate means a decrease of approximately 1% in the quantity of goods and services you can purchase with a given amount of money

- Inflation

Credit cards are convenient, but not always better, to use than installment debt because of the latter's application process and procedures; but that ease of use can lead to overuse (TRUE/FALSE)

- TRUE

Loans from finance companies and appliance stores tend to be the highest cost loans (TRUE/FALSE)

- TRUE

Most automobile financing agreements allow the lender to repossess your vehicle when you are in default on your payments (TRUE/FALSE)

- TRUE

The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors (TRUE/FALSE)

- TRUE