Exam 2- personal finance
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.
