Personal Finance: Exam 2

Unit price formula

(price of item / number of units)

Finance charges

The total dollar amount you pay to use credit

The five steps in the homebuying process

1. Determine homeownership needs. 2. Find & evaluate a property to purchase 3. Price the property 4. Obtain financing 5. Close the purchase transaction.

Three questions to ask yourself before making major purchases using credit

1. Do I have the cash I need for the down payment? 2. Does the purchase fit my budget? 3. Can I use the credit I need for this purchase in a better way?

The usual range, in years of a mortgage

10 to 30 years

It's suggested you spend no more than what percent of your take-home pay on housing?

30%

The range of credit scores from bad to perfect

300 to 850

Cost of credit

= down payment + (payment amount x # of payments) - cash price

Purchase requirement

= membership fee / discount rate

Open ended credit

A line of credit in which loans are made on a continuous basis, and the borrower is billed periodically for at least partial payment You may have to pay interest or other financial charges E.g., cards issued by department stores and bank cards, travel and entertainment, and overdraft protection

Mortgage

A long-term loan on a specific piece of property, such as a home or other real estate

US savings bonds

A low risk savings program guaranteed by the federal government Long term IOU

Credit score

A number that reflects the information in your credit report

Money market account

A savings account that requires a minimum balance with earnings based on the changing market level of interest rates Are covered by federal deposit insurance

Money market fund

A savings investment plan with earnings based on investments in various short term financial instruments

Warranty

A written guarantee from the manufacturer or distributor, specifying the conditions, under which the product can be returned, replaced, or repaired

Credit

An arrangement to receive cash, goods, or services now, and pay for them in the future

The types of financial institutions

Deposit institutions and non-deposit institutions

Price the property (S3)

Determine an appropriate market price Negotiate an agreement price

Obtain financing (S4)

Determine the amount of down payment Investigate the rates and conditions of mortgages Apply for a mortgage and evaluate types of mortgages

The key factors that affect daily buying habits of consumers

Economic, social, and personal factors

Brokerage firms (NDI)

Employ investment, advisors, and financial planners Serves as an agent for buying and selling stocks, bonds, and other investments securities

Some advantages of using consumer credit to make purchases

Enables people to enjoy goods and services now (car, home, education) It can also provide for emergencies

What does the phrase "cost of credit" refer to?

Finance charges Annual percentage rate (APR)

When is it usually required to get private mortgage insurance (PMI)?

If the down payment is less than 20%

Other types of financial services

Insurance, investments, tax assistance, financial planning

Non-deposit institutions

Life insurance companies Investment companies Brokerage firms Credit card companies Finance companies Mortgage companies

Important things to consider when selecting an apartment

Location Financial aspects Building exterior Building interior Layout and facilities

Phase 3: Selection and Purchase

Negotiation activities to obtain lower prices, or added quality Payment alternatives, including use of cash and various credit plans

Commercial banks (DI)

Offer a full range of financial services to individuals, businesses, and government agencies. Exist in several types: National Regional Community Online only

Investment companies (mutual funds) (NDI)

Offer a money market fund Not covered by federal deposit insurance

Closed ended credit

One time loans that the borrower pays back in a specified period of time, and in payments of equal amounts E.g., mortgage, automobile, and installment loans

Many benefits of leasing a vehicle

Only a small cash outflow may be required for the security deposit Monthly lease payments are usually lower than monthly financing payments You are usually able to obtain a more expensive vehicle

Mutual savings banks (DI)

Our owned by depositors and specialize in savings accounts and mortgage loans Profits are shared by depositors, usually through higher earnings on savings

Several ways to improve your credit score

Pay bills on time Understand how your credit score is determined Beware of credit repair scams

The four phases of research based buying

Phase 1: Pre-shopping activities Phase 2: Evaluating alternatives Phase 3: Selection and purchase Phase 4: Post purchase activities

Phase 2: Evaluating alternatives

Price analysis, including consideration of the costs at various buying locations Comparison shopping activities

Phase 1: Pre-Shopping Activities

Problem, identification to set a goal and focus your purchasing activities Information gathering to benefit from the buying experience of others

Phase 4: Postpurchase activities

Proper maintenance and operation Resolution of purchase concerns that may occur

Life insurance companies (NDI)

Provide financial security for dependence with various insurance policies, some containing savings and investment features Some offer investment and retirement planning, as well

Finance companies (NDI)

Provide loans to customers and small businesses Short and intermediate terms with higher rates than most other lenders charge

Consumer credit

Refers to the use of credit for personal needs (except a home mortgage) Based on trust in peoples ability and willingness to pay bills when due

Certificate of deposit (CD's)

Requires a certain amount to be left on deposit for a stated time period. To earn a specified interest rate.

Types of financial services

Savings, payment, borrowing

The different types of costs that are associated with the cost of renting

Security deposit Utilities Renters insurance

Find and evaluate a property to purchase (S2)

Select your location Consider using a real estate agent Conduct a home inspection

Credit card companies (NDI)

Specialize in funding short term retail lending

Some disadvantages of using consumer credit to make purchases

Temptation to overspend Failure to repay may result in loss of income, valuable property, and your good reputation Credit cost money, and paying for purchases over a period of time is more costly than paying with cash

Simple interest

The interest computed on the principle only and without compounding Interest = Principle x rate x time

Annual percentage rate (APR)

The percentage cost (or relative cost) of credit on a yearly basis

Annual percentage yield (APY)

The percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day period (Interest amount / Principle) * 100

What it means to have a credit score

This summarizes your credit history and helps creditors predict how likely it is you will repay loan and make timely payments

Savings and loan associations (S&L) (DI)

Traditionally specialized in savings accounts and mortgage loans Have expanded to offer financial services, comparable to those of a bank

Unit pricing

Uses a standard unit of measurement to compare the prices of packages of different sizes

Many benefits of buying a vehicle

You have ownership over the vehicle No hidden costs for moving states or turning the car in early No need for banks or dealerships if enough money is saved up

Compound interest

Interest earned on interest The result of reinvesting interest, or adding it to the principle sum of a loan or deposit

Determine homeownership needs (S1)

Assess types of housing units Calculate the amount you can afford

Deposit institutions

Commercial banks Savings and loading associations (S&L) Mutual savings banks Credit unions

Lease for a motor vehicle

Contractual agreement with monthly payments for the use of an automobile over a set time., Typically three, four, or five years

Mortgage companies (NDI)

Are organized primarily to provide loans for home purchases

Credit unions (DI)

Are user owned, nonprofit, cooperative, financial institutions that are organized for the benefit of their members Lower fees and lower loan rates, with higher satisfaction levels, compared to other financial institutions

Close the purchase transaction. (S5)

Arrange a closing date Obtain funds and documents for closing Request clarification for unclear aspects of the transaction