Personal Finance Test 2
Five steps to selecting a financial institute
1. List features most important to you 2. Rank the top 3-4 features 3. List local, online, and national institutions 4. Conduct research (talk w/ friends, online research, personal visit) 5. Balance your needs with information collected
three types of closed-ended credit
1. installment sales credit 2. installment cash credit 3. single lump sum credit
Daily financial mistakes
overspending (impulse buying, using credit), insufficient liquid assets, using savings/borrowings to pay current expenses, failing to put unneeded funds in an interest bearing/investment account
Series EE
patriotic bonds sold at half of the face value; face value is $50 - $5000; interest is compounded annually; fixed interest rate; penalty if redeemed within 5 years; continues earning interest for 30 years; potential tax advantages if used pay tuition
Problematic financial businesses
pawn shops, check cashing outlets, payday loan companies, rent to own centers, car title loans
collateral
a valuable asset that is pledged to ensure loan payments
bank reconciliation
accounts for differences between the bank statement and your checkbook balance
Brokerage firms
acts as agent between the buyer and seller for stocks, bonds, and other investment securities
traveler's check
allow you to make payments when you are away from home; requires you to sign each check twice
credit bureau
an agency that collects information on how promptly people and businesses pay their bills (Experian, TransUnion, Equifax)
Service contracts
an agreement between a business and a consumer to cover the repair costs of a product; also called an extended warranty
asset/cash management account
an all-in-one account that includes savings, checking, borrowing, investing, and other financial service for a single fee
APR (Annual percentage rate)
percentage cost of credit on a yearly basis, key to comparing costs when shopping for rates
certified check
personal check with guaranteed payment
Mortgage companies
provides home mortgage loans
prime rate
rate banks charge large corporations
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 year
credit report
the record of your complete credit history
Arbitration
the settlement of a difference by a third party whose decision is legally binding
finance charge
the total dollar amount you pay to use credit
Debt to equity ratio
total liabilities/ net worth (less than one)
Inexpensive loans
borrowing from parents or family members
Loans
borrowing money with an agreement to repay along with interest within a certain amount of time
Payday loan companies
cash advances; check advances loan; post-dated check loans; delayed-deposit loans; higher interest rates
the five Cs of credit
character, capacity, capital, collateral, conditions
Check cashing outlets
charge 1-20% of checks face value; 1-3% is average; aka currency exchanges
Savings and loan associations
checking accounts, specialized savings plans, loans and financial planning, and investment services
New Car Warranties
coverage of basic parts against defects; power train converge for the engine, transmission, and drive train; and corrosion warranties
Implied warranty
covers a product's intended use or other basic understandings that are not in writing
rate of return/yield
earnings on savings; frequency of compounding increases return
I-bonds
earns a fixed rate plus an inflation rate; twice a year inflation adjustment
Expensive loans
finance companies and retail stores that lend to consumers will frequently charge high interest rates, ranging from 12-25 %
simple interest
interest compounded on principal only and without compounding
debt payments to income ration
monthly debt payments/ net monthly income (consumer credit payments should not exceed a maximum of 20% of your net income)
Series HH
no longer sold; current income bonds; pays interest every 6 months; interest direct deposited and taxed as current income
legal aid society
one of a network of publicly supported community law offices that provide legal assistance to people who cannot afford their own attorney
Closed-ended credit
one-time loans, for specific purpose, that you pay back in a specified period of time, and in payments of equal amounts (student or car loans)
Commercial Banks
organized as corporations; offer a full range of services including checking, savings, lending, and other services
line of credit
the maximum dollar amount of credit the lender has made available to you
Credit
An arrangement to receive cash, goods or services now and pay for them in the future
Types of endorsements
Blank endorsement (signature only), restrictive endorsement (for deposit only), special endorsement (pay to the order of)
Deposit Financial Institutions
Commercial banks, savings and loan associations, mutual savings banks, credit unions
FDIC
Federal Deposit Insurance Corporation
Capitalized Cost
Price of vehicle
US Savings bonds
Series EE, Series HH, I-bonds
Financial services research
Services offered, fees disclosure, minimum balance, savings rate sheet, simple loan application, sufficient deposit insurance
promotional CD
a CD that attempts to attract savers with gifts or special rates
stock-indexed CD
a CD that has earnings based on the stock market with higher earnings in times of strong stock performance
bump-up/rising-rate CD
a CD that has higher rates at various intervals (ex. a couple months)
callable CD
a CD that starts with higher rates and long-term maturities
cashier's check
a check of a financial institution
Money market funds
a combination savings-investment plan offered by investment companies; not covered by FDIC
leasing
a contractual agreement with monthly payments for the use of an automobile over a set time period, typically 3-5 years
small claims court
a court that settles legal differences involving amounts below a set dollar limit; usually takes place without a lawyer
FICO
a credit score company; scores between 350-850, higher score = less risk
Chapter 13 bankruptcy
a debtor with a regular income proposed a plan for using future earnings or assets to eliminate his or her debts over a period of time
installment cash credit
a direct loan of money for personal purposes, home improvements, or vacation expenses
class-action suit
a legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice
trust
a legal agreement that provides for the management and control of assets by one party for the benefit of another
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 (credit cards)
installment sales credit
a loan that allows you to receive merchandise, usually high-priced items such as large appliances or furniture
single lump-sum credit
a loan that must be repaid in total on a specified day, usually within 30 to 90 days
credit rating
a measure of a person's ability and willingness to make credit payments on time
interest
a periodic charge for the use of credit
revolving check credit
a prearranged loan for a specified amount that you can use by writing a special check
money market account
a savings account that requires a minimum balance and has earnings based on the changing market level of interest rates
Certificates of deposit (CD)
a savings plan requiring that a certain amount be left on deposit for a stated period to earn a specific interest rate
money factor
the interest rate being paid on the capitalized cost
compounding
interest that is earned on previously earned interest
Rent to own centers
lease merchandise at high interest rates to low income consumers
Non-deposit financial institutions
life insurance companies, investment companies, brokerage firms, credit card companies, finance companies, mortgage companies
Home equity loans
loan based on your home equity (current market value of your home minus the amount you still owe on the mortgage) interest is tax deductible, used only for major purposes
Pawn shops
loans on possessions; higher fees, 3% per month common; used for quick cash
Medium priced loans
loans with moderate interest rates from commercial banks, savings and loans associations, and credit unions
money order
may purchase from financial institutions, post offices, and stores
Fair Credit Billing Act (FCBA)
sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments
Mutual savings bank
specialized in savings accounts and mortgage loans; owned by their depositors with profits going back to depositors by paying a higher rate on savings
Credit card companies
specializes in short-term retail lending
Chapter 7 bankruptcy
straight bankruptcy in which many, but not all, debts are forgiven; most of the debtor's assets are sold to pay off creditors
principal
the amount borrowed
capital
the amount of your assets that exceed your liabilities, or the debts that you owe
payment schedule
the amount paid monthly and the number of payments
Mediation
the attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation; nonbinding
capacity
the borrower's ability to pay additional debts
character
the borrower's attitude toward his or her credit obligations
residual value
the expected value of the vehicle at the end of a lease
conditions
the general economic conditions that can affect a borrower's ability to repay a loan, such as unemployment and recession
Price Comparison
unit pricing= the standard unit of measure, coupons and rebates; large is not always best to buy; sales prices are not always savings; online sources can save time; more convenient or ready to use is higher priced
interest rates rise
use long term loans to take advantage of current low rates; select short term savings instrument to take advantage of higher rates when they mature
Consumer credit
use of credit by individuals for personal needs, except home mortgage; major force in our economy
interest rates fall
use short term loans to take advantage of lower rates when you refinance the loans; select long term savings instruments to "lock in" earnings at current high rates
Credit unions
user-owned; non-profit, provide comprehensive financial services; lower fees; lower loan rates
Express Warranty
usually in writtenform, created by the seller or manufacturer; has two forms: full warranty or limited warranty
Warranty
written guarantee, from manufacturer or distributor specifying the conditions under which the product can be returned, replaced, or repaired