Finance Exam 3- Ch. 9

What is the total cost of leasing a vehicle for three years that requires a security deposit of $300 (would earn 3% interest in a money market account otherwise), has monthly lease payments of $385, and has a mileage restriction of 10,000 with excess mileage resulting in a 10 cents per mile charge. Assume that the lease exceeds this limitation by 8,000 miles.

$14,687

What would be the total cost of leasing a vehicle for four years that requires a security deposit of $1,000 (which would be withdrawn from your portfolio, which earns 9% per year), has monthly lease payments of $500, and has a mileage restriction of 20,000 with excess mileage resulting in a 10 cents per mile charge. Assume over the life of the lease you exceed the mileage limitations by a total of 8,000 miles.

$25,160

You have a home with a market value of $200,000. Your total equity in the home is $40,000. The maximum home equity loan available if the bank will loan 80% based on equity is invested is

$32,000

A few years ago Mary purchased a home for $100,000. Today the home is worth $150,000. The remaining balance on the mortgage is $50,000. If Mary can borrow up to 80% of the market value of the equity, the maximum amount she can borrow is

$80,000

If you borrow an $8,000, 6.75% home equity loan, what is your tax savings for one year assuming your marginal income tax rate is 15%?

$81

Frank purchase his home in 1997 for $130,000. He added an addition costing $35,000. The current tax assessed value is $80,000 while the current market value is $185,000. If Frank's current mortgage balance is $95,000, his equity in his home is

$90,000

Rick needs an advance on his $600 bi-weekly paycheck. He goes to Cash King where he writes them a check for $690 and dates the check two weeks from today. The cost of financing Rick's payday loan is

391%

Financial institutions provide home equity loans up to ____ of the value of the equity in a home

80%

Rate that measure the finance expenses

APR

Which method of calculating interest is the most expensive?

add-on interest

All of the following are true of a home equity loan except it

allows you to borrow up to 80% of the market value of your home

To repay the principal of a loan through a series of equal payments

amortize

The APR measures the finance expenses (including interest and all other expenses) on a loan on an

annualized basis

What is a good source to estimate the maximum amount you can borrow, based on financial information you provide?

auto loan internet sites

If you always drive cars many miles and keep them for 10 years, it would probably be best to

buy a new car

Assets of a borrower that back a secured loan

collateral

Assets of a borrower that back a secured loan in the event that the borrower defaults

collateral

Who provides personal loans?

commercial banks, savings institutions, credit unions and finance companies

Regarding automobile insurance, it is better to

compare cost before you commit to buying a particular car

Automobile insurance rate are likely to differ for what reasons dealing with cars?

cost more to repair after accidents, are more common theft targets, are higher priced

Disadvantages of leasing a vehicle include all of the following except

cost of finding a buyer for the car at the termination of the lease

In making the purchase versus leasing decision, it is important to remember that

dealers may impose an additional mileage cost

T/F. Because interest is tax deductible and payments are deferred until you graduate, it is good advice to take out he maximum student loan for which you can qualify

false

T/F. Financial institutions provide home equity loans up to a maximum of 70% of the value of the equity in a home

false

T/F. In securing personal loans from family members or friends the loan agreement should be verbal or just consist of a "gentleman's understanding."

false

T/F. It is usually better to lease a vehicle than by one, since you are not responsible for the repairs or maintenance on a leased car.

false

T/F. Leasing a car is a good option if you drive many miles a year

false

T/F. Shopping for automobile insurance should begin immediately after you close the deal on the car

false

T/F. The cost of financing with a payday loan is more reasonable than the cost of obtaining credit through a credit card

false

What is the most common source of financing in a personal loan?

financial institutions

What are the two sources of personal loans?

financial institutions and family members/ friends

What is the correct chronological order?

good credit history, loan application, loan contract, repayment schedule

The more expensive the car, the ____ the payments, and the ____ you can put away in other investments

higher; less

A loan based on the difference between the appraised value of your house and the balance due on your mortgage is called a ___ ____loan

home equity

The amount of the loan is based on what?

how much the lender believes you can pay back in the future

Which of the following statements about student loans is not true?

if you don't complete your education, you will not have to pay back your student loan

Over the life of a loan, the payment to principal ____ and the portion to interest expense _____.

increases; decreases

Which of the following is a true statement about student loans?

interest payments are often deferred until the students graduate and enter the workforce

As more of the principal is paid down, the amount of ___ is reduced, and a larger portion of the payment is used to repay ____.

interest; principal

When considering how much money to spend on the purchase of a new car you must consider how your choices affect your spending on other needs. The ____ solution limits your purchases to what you can afford pay off when your credit card bill arrives each month.

limited debt

Disclosure of information including a balance sheet and cash flow statement

loan application

A contract that specifies the terms of a loan, as agreed to by the borrower and the lender

loan contract

If you are considering trading in a used car on your new one, it is best to

make the trade-in deal a separate transaction for the new car deal

The life or duration of the loan

maturity

Advantages of leasing a vehicle include all of the following except

no maintenance costs

A short-term loan provided in advance of a paycheck

payday loan

What must you provide when applying for a loan in order to prove you have collateral to back your loan?

personal balance sheet

When applying for a loan, you need to provide info from what two things to document your ability to repay the loan?

personal balance sheet; personal cash flow statement

What should you consider when selecting a vehicle?

personal preferences, insurance costs, resale value, condition, price

Purchasing a car is a big decision. Therefore you should not

rely on the dealer personnel as the best source of expert advice

In the past you have purchased cars that you have driven for over 10 years or more. The mileage on these vehicles usually exceeded 100,000 and therefore you just give them to one of your teenaged nieces/nephews or your grandchildren. Based on this history, your primary financial selection criteria will be

repair expense

Can be determined from the internet and other sources and should be a consideration in buying a car

resale values

When negotiating the price of any car, which of the following statements is true?

sales ppl are trained to act as if they are giving the car away

A loan that is backed or secured by collateral

secured loan

Interest rate multiplied by the principal

simple interest

A method of computing interest based on the existing principal amount of the loan

simple interest method

What does the Truth-in-Lending Act (1969) require?

specify a standard loan rate

A loan provided to finance the expenses of a person pursuing a college degree is called a

student loan

In which of the following scenarios would you favor leasing over purchasing a car?

the car in question is one whose value depreciates rapidly

All of the following are reasons to avoid payday loans except

the cost of financing with a payday loan is exorbitant

You should borrow only the amount of funds that you will need because you will be charged interest on

the entire amount that you borrow

When assessing the condition of a used car, you should carefully consider all of the following except

the insurance premium the previous owner paid

What do personal preferences for a car include?

the size of the car, the price of the car, and the size of the engine and fuel economy

The monthly payment is dependent on what three things?

the size of the loan, the interest rate, and the maturity

What is the most favorable car financing?

there is not one best deal every time

T/F. A payday loan is a short term loan provided to you if you need funds in advance of receiving your paycheck

true

T/F. A personal loan is different from a credit card in that it is normally used to finance one large purchase.

true

T/F. Advantage to leasing a car instead of buying one are that you need less of a down payment and that you do not need to worry about finding a buyer for your car when the lease is over.

true

T/F. Because the market value of homes may decline, lenders do not like to lend the full amount of the equity when extending a home equity loan

true

T/F. Determining the amount of money you can afford to borrow on a personal loan is a decision that should be included in your personal financial plan

true

T/F. Even though you don't use the proceeds to improve your home, the interest on a home equity loan is deductible from your federal income taxes

true

T/F. Home equity is defined as the market value of the home less the debt owed on the home

true

T/F. If the interest rate are the same, a loan using add-on interest will have higher payments and charges than a loan using simple interest.

true

T/F. One alternative to payday loans is to avoid borrowing until you have the funds to spend

true

T/F. The decision to purchase versus lease a car is highly dependent on the estimated market value of the car at the end of the lease period

true

T/F. The proceeds from a home equity loan can be used for any purpose including a vacation, tuition payments, or health care expenses

true

T/F. There are set limits on how much a student can borrow each year for student loans, but these limits usually increase each year as the student progresses.

true

A loan that is not backed by collateral

unsecured loan

The cost of leasing a car versus purchasing one

varies depending on a multitude of factors

The advantage to financing a car for a long period of time (of up to seven years) is

your monthly payment will be lower