Exam 2- personal finance

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The three major credit bureaus​ are

Equifax, Rxperian, Trans Union

They score your credit rating based​ on: ​(Select the best answer​ below.)

FICO for credit scoring which is based on payment history and levels of debt

A weak credit report can affect you​ because: ​(Select the best answer​ below.)

assets are reviewed to serve as a collateral for the loan credit history is reviewed to evaluate the amount of credit currently serviced and the timeliness of the past payments

Collateral​ includes: ​(Select the best answer​ below.)

assets used to back a loan in the event that the borrow defaults

A market analysis of the home​ is: ​(Select the best answer​ below.)

based on the prices of similar homes in the area.

You should offer the​ price: ​(Select the best answer​ below.)

based on your market analysis.

Loan agreements with family and friends​ should: ​(Select the best answer​ below.)

be in writing and signed by all parties

A common range of interest rates on credit cards​ is: ​(Select the best answer​ below.)

between 15-20%

Cash advances are commonly​ obtained: ​(Select the best answer​ below.)

by writing a check provided by the credit card company or from ATMs

The annual percentage rate​ (APR) measurement: ​(Select the best answer​ below.)

calculates both interest and other fees on a loan on an annualized basis.

Sources of personal loans​ include: ​(Select the best answer​ below.)

commercial​ banks, savings​ institutions, finance​ companies, and credit unions.

The first step in buying a home is​ to: ​(Select the best answer​ below.)

compare existing homes for sale in your area so you can compare the cost of buying to the cost of renting.

What information is not contained in a loan repayment​ schedule? ​(Select the best answer​ below.)

comparison of your interest rate and the current interest rate

Simple interest​ is: ​(Select the best answer​ below.)

computed as a percentage of the existing loan amount.

The first step in financing a car purchase is​ to: ​(Select the best answer​ below.)

determine the amount of monthly payment you can afford

Which of the following is not a step you can take to safeguard your personal​ information? ​ (Select the best answer​ below.)

do not carry a cell phone

The two financial components you must consider before purchasing a home are​ the: ​(Select the best answer​ below.)

down payment and the monthly mortgage payments.

What is a disadvantage of using​ credit?

enables users to buy on impulse

You consider these financial components so you​ can: ​(Select the best answer​ below.)

focus on homes you can afford

Some creditors may also extend credit at higher interest rates to individuals​ who: ​(Select the best answer​ below.)

have a higher risk of defaulting

Credit cards are a convenience and you should not use them unless​ you: ​(Select the best answer​ below.)

have the cash to cover the payment

What information is not important when applying for​ credit?

health insurance

What attribute are creditors looking to​ avoid? ​(Select the best answer​ below.)

high expenses

Credit card interest rates tend to​ be: ​(Select the best answer​ below.)

higher than rates on other debt

With cash​ advances, the interest rate is​ usually: ​(Select the best answer​ below.)

higher, there is no grace period, and there may be a transaction free of 1-2% of the advance

From the personal cash flow​ statement, lenders can​ determine: ​(Select the best answer​ below.)

if borrowers have sufficient cash flow to cover their loan payments.

One step for using credit cards wisely is​ to: ​(Select the best answer​ below.)

impose a tight credit limit

The Equal Credit Opportunity Act prohibits that credit be denied due to all of the following reasons ​except: ​(Select the best answer​ below.)

insurance coverage

Loan payments under the simple interest method are usually lower than loan payments under the​ add-on interest method because​ the: ​(Select the best answer​ below.)

interest is calculated on the remaining balance

A real estate broker can help you​ by: ​(Select the best answer​ below.)

offering suggestions on homes that satisfy your preferences.

A step you should not take if you become a victim of identity theft​ is

open new accounts with an alias

In the loan application​ process, the information the borrowers must supply to the lenders​ is: ​(Select the best answer​ below.)

personal balance sheet and a personal cash flow statement

You can use a grace period to your advantage by​ making: ​(Select the best answer​ below.)

purchasing earlier in the billing cycle giving you a longer period of free credit

Loans backed by collateral are​ called: ​(Select the best answer​ below.)

secured loans

One way to reduce an excessive credit card balance is​ to: ​(Select the best answer​ below.)

sell some of your assets to pay off credit, and to work more hours

The personal loan process​ involves: ​(Select the best answer​ below.)

submitting the​ application, negotiating the loan​ contract, and negotiating the interest rate.

Aside from the interest​ rate, the two factors that will have the largest impact on the size of your monthly payment​ are: ​(Select the best answer​ below.)

the amount borrowed and the length of the loan.

A cash advance​ is: ​(Select the best answer​ below.)

when the cardholder receives cash rather than goods/services

Could lenders with the same interest rate report different​ APRs? ​(Select the best answer​ below.)

yes depending on other fees charged

Why is paying your credit card balance in full so​ important? ​(Select the best answer​ below.)

you can avoid interest charges

If you cosign a​ loan,: ​(Select the best answer​ below.)

you can be required to pay the balance of the loan not repaid by the borrower

Purchasing a new car online is not as efficient as buying a new car at a dealership​ because: ​(Select the best answer​ below.)

you can't test drive a car online

When determining affordable monthly mortgage​ payments, you should​ consider: ​(Select the best answer​ below.)

your monthly cash inflows and outflows

If you are denied​ credit, do you have the right to know the reason for the​ denial? ​(Select the best answer​ below.)

​Yes, the applicant must be notified with the reason within 30 days of the denial of a credit application.

Which of the following is not one of the disadvantages of leasing a​ car? ​(Select the best answer​ below.)

Your equity in the car is limited to your lease payments.

A home equity loan​ is: ​(Select the best answer​ below.)

a line of credit that allows the homeowner to borrow against the equity in their home.

Each mortgage payment​ represents: ​(Select the best answer​ below.)

a portion of payment towards the principal and a portion of payment towards the interest.

Why should you​ self-impose a tight credit​ limit? ​(Select the best answer​ below.)

a tight credit limit will assure you have the cash for other expenses and to invest

One of the factors is used to determine your credit score and how it is weighted by FICO​ is

amount of monthly credit used is weighted at 30%

If you fail to live up to your responsibilities as a​ cosigner,: ​(Select the best answer​ below.)

it may restrict the amount you can borrow.

A convenient location affects your​ home-buying decisions​ because: ​(Select the best answer​ below.)

it will affect your ability to keep the house in good condition

Interest rates are​ usually: ​(Select the best answer​ below.)

lower on secured loans because the lender can has less to lose in the event the loan is not repaid

Charging large amounts on your credit cards can affect your overall financial planning​ by: ​(Select the best answer​ below.)

lowering your liquidity level and restricting you from getting other finances

Once you have reduced your list of three or four homes down to one​ home, your next step is​ to: ​(Select the best answer​ below.)

make the seller an offer.

You can improve your credit score​ by:

making at least the minimum payments, reducing the debt load, becoming current with payments

Mary and Marty are interested in obtaining a home equity loan. They purchased their house five years ago for ​$135,000​, and it now has a market value of ​$164,308. ​Originally, Mary and Marty paid ​$30,471 down on the house and took out a ​$104,529 mortgage. The current balance on their mortgage is ​$99,315. The bank uses 60% of equity in determining the credit limit. What will their credit limit be if the bank uses the market value of equity to determine their credit limit and will loan them 60​% of the​ equity?

max AMT of credit provided=MKT value of equity in home*credit limit proportion MKT value equity in home=mKT value-mortgage

The three major credit​ bureaus: ​(Select the best answer​ below.)

may produce different scores because the information each bureau receives on the credit applicant may vary

The financial criteria that is the least important​ is: ​(Select the best answer​ below.)

minimum advertised price

An amortization table discloses the monthly mortgage payment based on​ the: ​(Select the best answer​ below.)

mortgage​ amount, a specified fixed interest​ rate, and a maturity.

Home equity​ is: ​(Select the best answer​ below.)

the difference between the market value of the home and the debt on the home.

Student loans are typically extended​ by: ​(Select the best answer​ below.)

the federal government or one of the financial institutions that participate in student loan programs.

Simple interest is measured using the​ principal,: ​(Select the best answer​ below.)

the interest rate applied to the​ principal, and the​ loan's maturity.

A disadvantage to using a credit card is​ that: ​(Select the best answer​ below.)

the interest rates are high if you do not pay off the balance when it is due

Borrowers prefer home equity loans to other loans​ because: ​(Select the best answer​ below.)

the interest rates are​ lower, since the home serves as collateral for the loan.

When determining an affordable down​ payment, you should​ consider: ​(Select the best answer​ below.)

the market value of your assets.

The most important financial criteria that should be considered when buying a car​ is: ​(Select the best answer​ below.)

the price is within your budget.

The reputation of the school system in the area of the home you are buying is important​ because: ​(Select the best answer​ below.)

the quality of a school system influences the home values.

Skimming

the thief copies the information contained in the magnetic stripe on the credit or debit card uses it to create fake cards

Dumpster Diving

the thief will go through the trash and take personal information that contains identifying numbers

Shoulder surfing

the thief will look over the shoulder of the victim and read the credit card number or PIN

Pretexting

the thief will obtain personal information under false pretenses by posing as a survey taker, employee of a financial institution etc (Phising and pharming are types of pretexting)

A grace period​ is: ​(Select the best answer​ below.)

the tim between your statement closing and the due date on the bill

One advantage of using a credit card is​ that: ​(Select the best answer​ below.)

they provide free financing until the statement arrives

You should review your credit report from each of the three major credit bureaus at least The review is beneficial because

twice a year, ensures that the report contains only correct information

Identity theft occurs when any individual theft?

uses your personal identifying information for personal gain without your permission

You can eliminate the annual fees that are charged by some credit cards​ by: ​ (Select the best answer​ below.)

using your card more frequently and paying your bills on time

Interest rates for home equity loans​ are: ​(Select the best answer​ below.)

variable and determined by the loan contract.

A finance charge is applied to credit​ purchases: ​(Select the best answer​ below.)

when a bill is not paid in full before the due date

Noel has a 25​% marginal tax rate. If he pays ​$2,220 in interest on a home equity loan in the first​ year, what will his tax savings​ be? ​(Hint​: Assume that all of the interest paid this year is tax​ deductible.)

2220*.25

​Fixed-rate mortgages offer a fixed rate of interest​ for: ​ (Select the best answer​ below.)

15 or 30​ years, and are preferred by many homeowners because their payment is not tied to market interest rates.

Negative credit information stays on the record for___ years

7

Margie has had a tough month.​ First, she had dental work that cost ​$797. ​Next, she had her car transmission​ rebuilt, which cost ​$1,330. She put both of these unexpected expenses on her credit card. If she does not pay her credit card balance when​ due, she will be charged 14% interest. Margie has ​$15,255 in a money market account that pays 9​% interest. How much interest would she pay​ (annualized) if she does not pay off her credit card​ balance? How much interest will she lose if she writes the check out of her money market​ account? Should she pay off the​ balance?

=(797+1330)*.14=297.78 interest lost=(797+1330)*.09=192.43 She should payy off the balance. She would pay 297.78 in terest if she does not and would only earn 192.43

Chrissy currently has a credit card that charges 11.5​% interest. She usually carries a balance of about ​$230. What will her total annual interest be with her current​ card?

=230*.115

Paul's credit card closes on the 16th of the​ month, and his payment is due on the 29th. If Paul purchases a stereo for​ $300 on June 17th, how many​ interest-free days will he​ have? When will he have to pay for the stereo in full in order to avoid finance​ charges?​ (Hint​: Assume that Paul pays off his credit card each​ month.)

=29-17+30=42 days He will have to pay by July 29th to avoid interest charges

Sharon is considering the purchase of a car. After making the down​ payment, she will finance ​$16,560. Sharon is offered three maturities. On a​ four-year loan, Sharon will pay ​$404.28 per month. On a​ five-year loan,​ Sharon's monthly payments will be ​$335.78. On a​ six-year loan, they will be ​$290.35. Sharon rejects the​ four-year loan, as it is not within her budget.​ So, Sharon would pay ​$3,586.80 in interest over the life of the​ five-year loan. On the​ six-year loan, Sharon would pay ​$4,345.20 in interest. If Sharon had been able to afford the​ four-year loan, how much interest would she have saved compared to the​ five-year loan?

=404.28*48=19405.44 19405.44-16560=2845.44 If Sharon had been able to afford the​ four-year loan, the amount of interest she would have saved compared to the​ five-year loan is ​(335.78*60)-16560-2845.44=741.36

You just borrowed ​$8,500 and are charged a simple interest rate of 8​%. How much interest do you pay each​ year?

=8500*0.08

Beth has just borrowed ​$2,700 on a​ four-year loan at 6​% simple interest. Complete the amortization​ table, for the first five months of the loan.

Amount applied to principle=payment-amount applied to interest Interest Owed=outstanding loan balance*interest rate*1/12 New Balance=beginning balance-amount applied to principal

Eileen is a college student who consistently uses her credit card as a source of funds. She has maxed out her credit card at the ​$8,800 limit. Eileen does not plan on increasing her credit card balance any​ further, but has already been declined for a car loan on a badly needed vehicle due to her existing credit card debt. Her credit card charges her 17% annually on outstanding balances. If Eileen does not reduce her credit card​ debt, how much will she pay annually to her credit card​ company?

=8800*.17

John and Cheryl just borrowed ​$30,900 on a home equity line of credit. The interest rate for the loan is 5.95 % for the entire​ year, and they took out the loan on May 1. John and Cheryl are in the 28% tax bracket. What will be their tax savings for the first year ending December​ 31? ​(Hint​: assume that all of the interest paid this year is tax​ deductible.)

AMT interest paid=loan*rate*8months/12 tax svings in one year=AMT interest paid*marginal tax rate

Which of the following is not one of the six major areas of information that may be included on your credit​ report? ​(Select the best answer​ below.)

Areas included: Your​ name, report​ number, and date b. Identifying information c. Potentially negative information from public records d. Unpaid accounts turned over to a collection agency e. All open and closed accounts f. Inquiries section OK

Jack needs to borrow ​$1,500 for one year. Bank South will give him the loan at 11​%. SunCoast Bank will give him the loan at 9​% with a ​$82 loan origination fee. First National will give him the loan at 7% with a ​$34 loan origination fee. Determine the total interest and fees Jack will be charged in each case. Which loan should Jack​ choose?

Bank South:=1500*.11=165 SunCoast: 1500*.09+82=217 First National: 1500*.07+34=139

Jarrod has narrowed his choice to two credit cards that may meet his needs. Card A has an APR of 26​%. Card B has an APR of 18​%, but also charges a ​$11 annual fee. Jarrod will not pay off his balance each​ month, but will carry a balance forward of about ​$195 each month. Which credit card should he​ choose?

Credit card A: =.26*195=50.70 Credit card B: =.18*195+11=46.10

Bill wants to purchase a new car for ​$59,000. Bill has no​ savings, so he needs to finance the entire purchase amount. With no down​ payment, the interest rate on the loan is 9​% and the maturity of the loan is six years. His monthly payments will be ​$1,063.51. ​Bill's monthly net cash flows are ​$832. Bill also has a credit card with a ​$12,913 limit and an interest rate of 14​%. If Bill uses all of his net cash flows to make the monthly payments on the​ car, how much will he add each month to his credit card balance if he uses it to finance the remainder of the​ car? What will the finance charges be on his credit card for the first two months that finance charges​ apply? ​(Assume that Bill makes no payments on his credit card for the first two​ months.)

Credit card balance=loan PMT-net cash flow Interest owed=credit card balance*interest rate*1/12 For Month two=add two credit card balance and interest owed Interest owed 2="" Total finance charges=interest owed 1+interest owed 2

Installment Credit

D. is issued for specific purchases but gives the borrower a longer time to repay the loan

Sharon is considering the purchase of a car. After making the down​ payment, she will finance ​$24,730.00. Sharon is offered three maturities. On a​ four-year loan, Sharon will pay ​$615.41 per month. On a​ five-year loan,​ Sharon's monthly payments will be ​$513.35. On a​ six-year loan, they will be ​$445.77. Sharon rejects the​ four-year loan, as it is not within her budget. How much interest will Sharon pay over the life of the loan on the​ five-year loan? How much interest will Sharon pay over the life of the loan on the​ six-year loan? Which should she choose if she bases her decision solely on total interest​ paid?

Five year loan=513.35*60= 30801-24730=6071 Six year loan=445.77*72 32095.44-24730=7365.44

In addition to financial​ losses, victims of identity​ theft:

May be detained by authorities and experience credit score deterioration

Troy has a credit card that charges 13​% on outstanding balances and on cash advances. The closing date on the credit card is the first of each month. Last month Troy left a balance on his credit card of ​$183. This month Troy took out a cash advance of ​$149 and made ​$315 in purchases. Troy made a payment of ​$202. What will the total of​ Troy's new balance be on his credit card​ statement, taking into account finance​ charges? (Assume the adjusted balance method is used and finance charges on the cash advance are applied for the entire​ month)

Monthly Finance Charge=(149+183)*.13*1/12=3.60 New Balance=183+149+315+3.60-202=448.60

Beth has just borrowed ​$12,900 on a​ four-year loan at 9​% simple interest. Using the simple interest​ method, her payments would be ​$321.02. What if Beth had made the same loan as an​ add-on interest​ loan? How would her payments​ differ? Why is there a​ difference?

PMT=(loan amount+(loan amount*interest rate*number of years))/number of months Total interest=loan*interest rate*number of years Total amount paid=borrowed amount-total interest paid monthly payment=total amount paid/total months difference=monthly payment-simple interest Monthly payment decreases using the simple interest method

Which of the following explains the difference between a​ 10% rate charged on a payday loan and a​ 10% rate charged by a bank on a personal​ loan? ​(Select the best answer​ below.)

Personal loans are based on APR standards and payday loans are not.

Which of the following is a characteristic of a student​ loan? ​(Select the best answer​ below.)

The tax benefits are phased out for individuals who are in high tax brackets.


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