Types of Credit (Review)

Other than rate, what factors should you consider before choosing a personal loan?

-flexibility of payment reschedule plan -are there regulations on how you can use the loan? -is there insurance available if you lose your job before the loan is paid off? -how much time you have to repay the loan

How is a credit card different from a debit card?

Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash

fixed vs adjustable rate mortgages:

FIXED: -keeps the same interest rate over the course of the loan -monthly payment is always the same ADJUSTABLE: -initial fixed interest rate -after the initial fixed period is up, interest rates can change based on market conditions -monthly payment may be higher or lower than last month WHEN COMPARING THE TWO, CONSIDER: -do you need to have a predictable monthly payment or are you are okay with fluctuation? -how long of a term are you going to be staying in the home? -do you want protection from rising interest rates in the future?

How does a secured credit card work?

First, you place a refundable security deposit using a bank transfer. The amount of your deposit becomes your spending limit and the credit card company holds your deposit as collateral. Purchases and payments are the same as with any other credit card and you get the deposit back when you close your account.

What is a joint account?

a bank account that has been opened by two or more individuals

What is an adjustable mortgage rate?

a home loan with an initial fixed interest rate that changes after a specified period of time depending on current market conditions; can only adjust once a year

home equity loan

a loan based on the difference between the current market value of a home and the amount the borrower owes on the mortgage

What is a cash advance?

a loan offered through your credit card company with which you are able to borrow cash up to a certain limit

What is a payday loan?

a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.

What is an authorized user?

a secondary account holder on a credit card.

home equity line of credit

a secured loan that allows the borrower to obtain advances up to an amount that represents a specific percentage of the borrower's equity in a property.

When referring to student loans, what is the "grace period?"

a set length of time after the due date during which payment may be made without penalty

When referring to a loan, what is the principal?

the amount of money you are borrowing

What factors affect the monthly payment on a loan?

the amount of the loan, the APR, and the length of the loan term

When referring to a loan, what is the term?

the amount of time you have to pay back the principal with interest

What is a home equity?

the current value of your property - the money you still owe on that property

What is a loan?

A loan is a type of borrowing in which you are credited with a fixed amount for a fixed period of time at a certain rate of interest; people typically use loans to buy expensive personal purchases

What does it mean to consolidate your loans?

All of your original loans are paid off by your lender and replaced with a single, new loan (with new terms)

How do banks make a profit?

Because banks are required to keep a certain fraction of money in reserve to cover depositors' withdrawals from their accounts, the only way a bank can really make a profit is by jacking up the interest rates on loans and hoping that people will default on their credit.

What is co-signing?

Sharing responsibility for debt with another person

How can you avoid paying interest on purchases made with a credit card?

by paying off your balance in full each month

With an amortized loan, the amount of interest....

decreases with each payment

Most students use a combination of out-of-pocket expenses, federal and private student loans to finance their education. You should always avoid borrowing more money than you can afford and, because private student loans are more costly over time, you should find out what ________________ you qualify for first.

federal aid

What are the three types of credit cards?

general purpose, store cards, and charge cards

Over time (with an amortized loan) the principle paid....

gradually decreases

The shorter your term length, the _________ your monthly payments, and the _________ total interest you will pay.

larger, less

What are installment loans?

loans used to finance a specific purchase for a specific amount of time. Regular payments are made to pay the interest and the principal.

The higher your credit score is, the _________ your APR.

lower

The larger your down payment amount, the ________ your monthly payments.

lower

What are some factors that determine interest rate?

-Credit score (how much debt are you currently paying off? how likely are you to pay back credit?) -Employment history (how long have you worked at your current job?) -Length of relationship with financial institute (how long have you been at your bank?)

Why do people tend to spend more money when paying with credit cards?

-There is no physical "loss" of handing over money -People focus on what they gain from a purchase, not on the financial loss it causes them -You aren't "paying immediately" and have the chance to pay back small amounts at a time

Why might someone want to utilize a balance transfer?

-You can use a balance transfer to move your credit card debt onto a new card from a different lender. -If you have several debts, you could also use a balance transfer to consolidate them under one account. -Balance transfer credit cards usually offer a 0% interest rate for a promotional period, which can help you save money as you pay off the debt.

Types of lenders who grant personal loans

-credit union -banks -online lenders

private student loans

-financed by private companies rather than the government -cost more than federal loans because the interest rates and fees for these loans are not capped by the government -repayment usually starts when you are still in school -you made need a parent or guardian to co-sign the loan if you are under 18 -repayment options are more limited and less lenient -beneficial when federal loans do not cover all of your educational costs

federal student loans

-financed by the US government -low interest rates (set by Congress) -you don't have to start paying until you graduate or attend less than full time -offer flexible repayment options -allow you to apply for a temporary break in payment if your financial situation becomes difficult -some may even be forgiven if you go into a career in fields such as healthcare, public service, or teaching

unsubsidized direct loan

-fixed interest rate -interest starts accumulating while you are still in school

direct plus loans

-fixed interest rate -offered to graduate and professional students (and sometimes parents)

subsidized direct loans

-fixed interest rate -government pays interest on the loan while you are still in school at least half-time

What are the four main types of credit?

-mortgages -loans -overdrafts -credit cards

Qualities of a charge card

-requires you to pay for purchases in one lump sum within a given period of time -you usually don't have to pay interest -balance must be paid in full each month

types of federal student loans

-subsidized direct loans -unsubsidized direct loans -direct plus loans

Qualities of a store card

-used only in a specific store or for a specific purpose -many stores offer promotions, such as 15% off your first purchase, as a reward for opening a store card -interest rate is typically a lot higher

Qualities of a general purpose credit card

-used to pay for anything from clothes and food to airplane flights -flexibility in amount spent/repayed month to month -If balance is not paid in full each month, interest will be added to the remaining balance

What are some benefits of using a credit card to make purchases?

-you don't have to carry cash -you can use it to pay for emergencies or unexpected, costly charges -you can still purchase necessities, even if you don't have the money to pay for them right now -you receive a monthly statement to track your spending -you can consolidate all of your bills into a single monthly payment

What is a mortgage?

A mortgage is a specific type of loan (for buying property) that is secured, meaning that if you don't keep up with your payments, you might lose your home or business

What is a balance transfer?

A balance transfer allows you to move your existing credit card debt to a new credit card with a lower or 0% rate of interest. This usually means you can repay your debt faster and save significantly on interest costs. However, once the introductory period ends, any remaining balances will start to collect interest at the standard purchase or cash advance rate.

What is a credit card?

A credit card is a license to borrow money from a bank or other financial organization; any charges you make to a credit card (including interest that has incurred on your balance) must be paid back

There are ways to lower your monthly payment: putting down a larger down payment or opting to pay off the loan over a longer term Why might someone purposely choose a HIGHER monthly payment?

A longer loan term can dramatically lower your monthly payment, but it also means you pay more in interest. It might seem like a bad idea to spend a larger chunk of money each month, but you will pay less in interest overall because you will pay off the loan in a shorter amount of time.

What is a secured credit card?

A secured credit card is a type of credit card for people with limited or damaged credit that requires the user to place a refundable security deposit, which the card's issuer holds as collateral until the account is closed. This deposit generally doubles as your spending limit, preventing you from charging more than you can afford to repay. So you're not really borrowing anything with a secured credit card, which is why such cards are easy for even people with bad credit to get.

What does it mean if a loan payment is amortized?

An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest. An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount. The total amount owed remains constant, but the interest rate decreases slightly over time because you are paying that off first.

What does APR stand for?

Annual Percentage Rate

Should you buy or rent a house?

BUYING: -your monthly payment typically doesn't vary -provides stability for you and your family -as a homeowner, you can deduct many related expenses, such as mortgage-related interest -diversifies your investments -you build your equity through paying down your mortgage over the years RENTING: -flexibility to move around or to explore other neighborhoods -avoiding homeownership costs; as a tenant, you enjoy the perks of your home without the worrisome financial burden -you do not risk tying up a large portion of your wealth in an illiquid asset like a house -creating a history of on-time rental payments can help to build your credit

How does your credit score impact the personal loan options you have available?

Borrowers with good to excellent credit (690 and above) will be offered lower interest rates and have the widest options when it comes to shopping for personal loans because they appear more trustworthly. Lenders view borrowers with average or bad credit as higher risks, and some may not offer loans or offer high interest rates as a result.

What should you do if you are having trouble making your monthly mortgage payments?

Contact your mortgage company right away to find out if there are any programs available that might be of help you. You might be able to qualify for a temporary payment reduction, or refinance for a lower payment depending on where you live and if you're past due on the loan.

What is credit?

Credit is an arrangement in which you receive money, goods, or services and agree to pay for it in the future. You will have to pay this loan back over regular intervals, with interest ontop of the principle.

Why is it best to get preapproved for a mortgage?

Getting preapproved for a mortgage helps you shop for homes within your means and shows you're a serious buyer. Getting preapproved also helps you find a mortgage lender that can work with you to select a home loan with an interest rate and other terms suited to your needs.

What will happen to the total cost of credit card purchases if you only pay the minimum amount?

If you only make the minimum payment each month, you'll maintain this high balance for much longer even if you stop using the card to make purchases.

What are overdrafts?

Overdrafts are facilities that allow you to spend more money than from your bank account than you actually have in the account. Banks often charge fees for overdrafts and may even make you pay interest.

Advantages and disadvantages of taking out a loan to buy a car

PROS: -Once paid off, the car is yours to keep -You do not have to pay extra for any damages to the vehicle CONS: -Higher monthly payments than that of a lease -You pay more money in interest because the value of the car is not being based on depreciation

Advantages and disadvantages of leasing a car

PROS: -You can make monthly payments -When the lease is up, you can buy the car from the dealer for its residual value (whatever it is worth at that time) -Monthly payment tends to be lower than that of a loan CONS: -You do not get your downpayment back -You have to either buy the car or return it to the dealer -You have to pay extra for excessive wear and tear

advantages and disadvantages of loan consolidation

PROS: -lower monthly payment -new (longer) repayment period based on the amount you owe -more flexibility; you can always pay more than the minimum each month, but do not have to worry about constantly making higher payments CONS: -you end up paying more in total -new terms may mean you miss out on loan benefits like interest-free deferment or loan cancellation for special circumstances -private loan consolidation takes your credit score into account when reevaluating the terms for your new loan

Briefly describe how a bank works.

People keep their money in banks and receive a small amount of interest in return for storing their money there. The bank takes this money and loans it out to people at much higher interest rates.

What is the relationship between people who save money in a bank and people who loan money from that same bank?

People who are "borrowing money from the bank" are technically borrowing the money from people who choose to save their money in the bank.

Compare and contrast secured/unsecured loans.

Secured loans (life insurance, mortgage, car payments, etc.) are less risky to the lender because they are secured with collateral. They may be more advantageous for the person loaning money because they have lower interest rates. Unsecured loans (student loans, credit loans, personal loans, etc.) do not have collateral, so they are more risky to lenders and as a result have higher interest rates.

What is the main difference between secured and unsecured loans?

Secured loans are protected by collateral (something valuable--like a car, boat, or property--that the lender can take as repayment if you default on your loan or can't pay it back)

What does it mean if a loan has a variable rate?

The interest rate on the loan will change in response to the market over time

What is dangerous about taking out a payday loan?

Unlike a traditional loan, you can't pay the money back in installments; you have to pay it back all at once. This is why most people end up paying a lot more "one time fees" to renew the loan until they can pay it back and as a result, end up spending much more money than they initially borrowed.

When financing a car, what is direct lending?

You agree to pay the amount financed, plus a finance charge, to a bank or other financial institution over a period of time. Once you're ready to buy a car, you use this loan to pay for it. Preapproval for financing before you make a final purchasing decision allows you to know the terms in advance, including the annual percentage rate (APR), length of term, and maximum amount

When financing a car, what is dealership financing?

You and a dealer enter into a contract where you buy a car and also agree to pay, over a period of time, the amount financed plus a finance charge. The dealer typically sells the contract to a bank, finance company or credit union that services the account and collects your payments.

What is a loan servicer?

an organization that manages loans and collects payments on behalf of the lender

What is revolving credit?

purchases as long as you're under the credit limit. Payment amounts vary each pay period based on the size of the debt.

Which types of credit involve repaying a fixed amount for a fixed number of months?

mortgages and loans

Which types of credit involve repaying different amounts each month, depending on your activity?

overdrafts and credit card payments

alternative lenders

private firms that charge high interest rates, collect payments on a daily or weekly basis to reduce risks, tend to overlook lower credit scores -Alternative lenders are particularly attractive to small businesses that don't have a stellar financial history, because approval requirements aren't as stringent. Alternative lenders make approval decisions and provide funding very quickly--usually in less than five days.

When loan payments are amortized, the total amount you owe every month....

remains the same

Small Business Administration loans

several loan programs designed to meet the financing needs of a range of business types. -With these loans, the government isn't directly lending small businesses money. Instead, the SBA sets guidelines for loans made by its partners, which include banks, community development organizations, and microlending institutions. -A government guarantee typically covers 75% to 90% of the loan, which eliminates much of the risk for the lender. SBA loan terms also tend to be more favorable to borrowers.

conventional bank loans

standard way banks lend money to companies with low-interest rates -Because a federal agency is not involved, the approval process can be faster. However, these types of loans typically include shorter repayment times than SBA loans, often include balloon payments, and it's often difficult to get approved for a conventional bank loan.

When referring to a loan, what is interest rate?

the percentage of the principal that your financial institution charges you for lending out the money