Chapter 7: The Costs of Credit Alternatives

which of the following loans are available to consumers through commercial banks?

-second mortgages -passbook loans -credit cards

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

-share draft loans - installment loans - credit card loans

passbook loans are offered by

commercial banks

The rule of 78s formula favors ______.

lenders

credit offered by car dealers is generally _______ expensive than most other car loans

less

Most automobile financing agreements permit your creditor to _______ your car anytime you are in default on your payments

repossess, repo, reposess, or reposses

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

you owe interest for every day until you repay the advance

if you are denied credit by a bank or credit union, you should question:

your ability to afford the higher rate charge by a loan company.

Credit Card issuers must provide certain information to consumers, including:

-penalty APR and when it applies -minimum interest charge, setup and maintenance fees -how to avoid paying interest - APR for purchases, balance transfers, and cash advances

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

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

Installment Loans are a cheaper alternative to credit cards because:

-their interest rates are often lower than credit card rates -they are cheaper over many months or years when an extended payment period is needed

The Truth in Lending law of 1969 requires lenders to state the cost of borrowing as a specific _______ amount so that consumers know exactly what the credit charges are.

dollar, currency, monetary, cash or $

The Fair Debt Collection Practices Act _______ to creditors that collect debts themselves.

does not apply

shopping for credit can easily be done by:

doing an internet search

Which of the following is NOT considered a top reason why consumers fail to make debt payments when they come due?

economic depression

Tax refund loans are a(n) ________ way to borrow money in case of a cash shortfall

expensive

payday loans are (inexpensive or expensive)______ although readily available via check cashers, finance companies, and other sources.

expensive

most credit card companies do not charge a fee when a cash advance is made.

false

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, charge or rate

CCCS counseling is usually ________.

free

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

grace or float

the interest rate on cash advances is often ______ than the rate on purchases.

higher, greater, bigger, larger, or more

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

cash advances on credit cards usually accrue _________ from the moment you accept the cash

interest

long-term financing is more costly than short-term financing because of higher ______ costs.

interest, finance, or borrowing

lenders can reduce their risk by which of the following?

large down payment

paying the _____ makes your credit card purchases much more expensive, especially at high interest rates.

minimum monthly payment

The Trustee's role in a Chapter 13 bankruptcy involves distributing _____ to creditors.

money, payment, cash, funds, or earnings.

looking for credit, aided by internet searches, is just as important as comparison _______ for large purchases such as automobile, furniture, or major appliances.

shopping, buying, or purchasing

which of the following BEST explains the flaw in the strategy of borrowing from a finance company?

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

the three types of credit insurance are:

- credit property -credit life -credit accident and health

which of the following types of loans are offered by consumer finance companies?

- second mortgages -personal installment loans

once you decide that you need to use credit to meet your needs, and assuming that you can afford the payments, you must ________ for the credit

Apply, qualify or shop

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

Cash Value of whole life

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

True

(T/F): 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

(T/F): the rule of 78s is a mathematical formula to determine how much interest has been paid at any point in a loan.

True

Loans from finance companies and appliance stores tend to be the highest cost loans.

True

(T/F) The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors.

True.

(T/F) Keeping up with the Joneses can contribute to a debt burden.

True. This is now more apparent than ever and is not just limited to prosperous families.

(T/F) The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors.

True. the act regulates the way collection agencies do business.

Consumer finance companies do not offer:

credit card loans

Which of the following are signs of possible debt problems?

-getting a credit card revoked -using up savings -having little in savings -borrowing money to pay old debts

The Two main activities of the CCCS are:

-helping families with debt problems by helping them manage debts -Teaching families how to avoid heavy debt burdens in the future

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 the costs of making only the minimum _______.

Payment or payments

(T/F) family loans are simple arrangements and can benefit both parties and no documentation is recommended.

False Family loans can be complicated, and steps should be taken to put family loan terms in writing.

only about one million Americans belong to credit unions

False about 100.5 million Americans belong to credit unions

The reason why people choose long-term financing is because it is cheaper in the long run.

False. people choose long-term financing because it requires smaller payments, making it cheaper in the short run. however, you pay more interest when you repay a long-term loan.

A $3,000 loan that uses add-on interest has the following terms: 6%, one year, two payments: one in 6 months and one in 12 months. What is the amount of each of these payments?

$1,590

Although credit counseling is often free, some agencies will charge a set-up fee. Which of the following is a likely set-up fee for credit counseling? ($10, $2000, $1000, $500)

$10

A simple interest declining balance loan has the following terms: 8% annual interest rate, $2,000 loan, two 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?

$1080 and $1040 You must include the principal of $1000 in each payment and the interest payments

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?

$1150, which is the unpaid loan balance and the towing charge.

on a discount loan of $2000 with $75 interest, how much will you receive for loan proceeds?

$1925

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

$27

if you borrow $200 and it cost you $27 in interest with a service charge of $6, what is the finance charge?

$33

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

You agree to pay a bank discount rate of 6% on a $1,000 loan. How much will you receive from the bank when you sign the papers and receive the funds?

$940

you agree to pay a bank discount rate of 6% on a $1000 loan. How much will you receive from the bank when you sign the papers and receive the funds?

$940

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 when meet that test?

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

Which of the following are ways to lower lender risk and therefore lower the cost of borrowing?

-Make a larger down payment -choose variable interest rate - only create short-term payments (lower rate and higher payments) -Secure a loan by property or another asset.

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 owed is due each month - full payment is due each month -annual fees are typically high

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

-Share draft loans -installment loans -credit card loans

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 pieces of information that credit card issuers must provide are______.

-annual fees -grace period -APRs -Variable rate information

which of the following is generally considered to be expensive sources of loans?

-department stores -finance companies -appliance companies -bank credit cards

which of the following items of income and value are protected under a Chapter 7 bankruptcy?

-equity in cars -SS payments and unemployment compensation -household appliances -trade tools -equity in home

which of the following are the top reasons why consumers can't pay debts when due

-finance charges -emotional problems -the use of money to punish -keeping up with the Joneses

the two major categories or types of credit are _____-end and open-end credit

Closed or close

Cash advances are obtained through your _____ card at a bank or through an ATM machine. This is a one-word answer and found in the discussion of cash advances.

Credit

Cash advances are obtained through your _______ card at a bank or through an ATM machine.

Credit

The most commonly purchased type of credit insurance is:

Credit Life Insurance

In a straight bankruptcy, many but not all _________ are forgiven.

Debts, liabilities, debt, obligations, or obligation

Credit life insurance is generally Blank______ expensive compared to equivalent term life insurance.

More

Two situations when you should avoid credit are: when you don't ______ or really want the purchase, and when you could pay cash but choose to finance the needed item.

Need or require

Sharon has been taking out student loans to finance her college education. She has amassed a great deal of debt, but plans to declare Chapter 7 bankruptcy to have the debt forgiven. Will her strategy work?

No, student loans are not forgiven in Chapter 7 bankruptcy.

What is the best strategy if you can't make a payment on a debt?

Notify the creditor as soon as possible in an attempt to work out a modified payment plan.

the interest rate on cash _____ is often higher than the rate on purchase

advances, advance, loan, loans, or borrowing

The first thing a debtor must do in a Chapter 7 bankruptcy is to draw up a petition listing _______ and liabilities or debts for submission to the court.

assets

Why are investors willing to pay a higher rate on loans when increased inflation is expected?

because they expect inflation to enable them to repay the loan with cheaper dollars.

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

tax

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.

Which of the following is true about a repossession and the borrower's responsibilities after an auction sale of the vehicle by the bank?

the borrower owes the difference between the sale price and the unpaid debt plus legal, towing, and storage costs

one reason some people use payday loans is that:

they are convenient

some credit card holders make the minimum payment to remain in good standing without making progress on reducing the outstanding balance. This is referred to as the minimum monthly payment _________.

trap

A chapter 13 Bankruptcy can be in effect for as long as _______ years.

5

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

Afford, repay, or pay

A married couple that does not talk about money could be:

Having debt Problems

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

Passbook

In Chapter 7 bankruptcy, a debtor is required to draw up a _______ listing his or her assets and liabilities.

Petition

Simple interest (/) is calculated as follows: _______ X Rate of Interest X Time.

Principal or P

An example of a travel and entertainment card is ________.

Diners Club

(T/F) the creditor in a Chapter 13 bankruptcy proposes a plan to pay off debts from future earnings over a period of time.

False. The debtor needs to propose a plan for paying his or her debts.

What would be the interest cost (simple interest) for a $3,000 loan with a 8% rate for nine months of a year?

$180

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

cash value of whole life

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

creditor, lender, bank, or financier

There are several reasons that you should borrow from a credit union, including their patience in dealing with borrowers who have good reasons for missed payments, and they provide ______ service.

personal, personalized, quality, great, good, customer, caring, or customized.

a credit counseling organization usually provides credit management classes and helps you devise a credit management _______.

plan, arrangement, scheme, strategy, or system