Personal Finance: Exam 2
Unit price formula
(price of item / number of units)
Finance charges
The total dollar amount you pay to use credit
The five steps in the homebuying process
1. Determine homeownership needs. 2. Find & evaluate a property to purchase 3. Price the property 4. Obtain financing 5. Close the purchase transaction.
Three questions to ask yourself before making major purchases using credit
1. Do I have the cash I need for the down payment? 2. Does the purchase fit my budget? 3. Can I use the credit I need for this purchase in a better way?
The usual range, in years of a mortgage
10 to 30 years
It's suggested you spend no more than what percent of your take-home pay on housing?
30%
The range of credit scores from bad to perfect
300 to 850
Cost of credit
= down payment + (payment amount x # of payments) - cash price
Purchase requirement
= membership fee / discount rate
Open ended credit
A line of credit in which loans are made on a continuous basis, and the borrower is billed periodically for at least partial payment You may have to pay interest or other financial charges E.g., cards issued by department stores and bank cards, travel and entertainment, and overdraft protection
Mortgage
A long-term loan on a specific piece of property, such as a home or other real estate
US savings bonds
A low risk savings program guaranteed by the federal government Long term IOU
Credit score
A number that reflects the information in your credit report
Money market account
A savings account that requires a minimum balance with earnings based on the changing market level of interest rates Are covered by federal deposit insurance
Money market fund
A savings investment plan with earnings based on investments in various short term financial instruments
Warranty
A written guarantee from the manufacturer or distributor, specifying the conditions, under which the product can be returned, replaced, or repaired
Credit
An arrangement to receive cash, goods, or services now, and pay for them in the future
The types of financial institutions
Deposit institutions and non-deposit institutions
Price the property (S3)
Determine an appropriate market price Negotiate an agreement price
Obtain financing (S4)
Determine the amount of down payment Investigate the rates and conditions of mortgages Apply for a mortgage and evaluate types of mortgages
The key factors that affect daily buying habits of consumers
Economic, social, and personal factors
Brokerage firms (NDI)
Employ investment, advisors, and financial planners Serves as an agent for buying and selling stocks, bonds, and other investments securities
Some advantages of using consumer credit to make purchases
Enables people to enjoy goods and services now (car, home, education) It can also provide for emergencies
What does the phrase "cost of credit" refer to?
Finance charges Annual percentage rate (APR)
When is it usually required to get private mortgage insurance (PMI)?
If the down payment is less than 20%
Other types of financial services
Insurance, investments, tax assistance, financial planning
Non-deposit institutions
Life insurance companies Investment companies Brokerage firms Credit card companies Finance companies Mortgage companies
Important things to consider when selecting an apartment
Location Financial aspects Building exterior Building interior Layout and facilities
Phase 3: Selection and Purchase
Negotiation activities to obtain lower prices, or added quality Payment alternatives, including use of cash and various credit plans
Commercial banks (DI)
Offer a full range of financial services to individuals, businesses, and government agencies. Exist in several types: National Regional Community Online only
Investment companies (mutual funds) (NDI)
Offer a money market fund Not covered by federal deposit insurance
Closed ended credit
One time loans that the borrower pays back in a specified period of time, and in payments of equal amounts E.g., mortgage, automobile, and installment loans
Many benefits of leasing a vehicle
Only a small cash outflow may be required for the security deposit Monthly lease payments are usually lower than monthly financing payments You are usually able to obtain a more expensive vehicle
Mutual savings banks (DI)
Our owned by depositors and specialize in savings accounts and mortgage loans Profits are shared by depositors, usually through higher earnings on savings
Several ways to improve your credit score
Pay bills on time Understand how your credit score is determined Beware of credit repair scams
The four phases of research based buying
Phase 1: Pre-shopping activities Phase 2: Evaluating alternatives Phase 3: Selection and purchase Phase 4: Post purchase activities
Phase 2: Evaluating alternatives
Price analysis, including consideration of the costs at various buying locations Comparison shopping activities
Phase 1: Pre-Shopping Activities
Problem, identification to set a goal and focus your purchasing activities Information gathering to benefit from the buying experience of others
Phase 4: Postpurchase activities
Proper maintenance and operation Resolution of purchase concerns that may occur
Life insurance companies (NDI)
Provide financial security for dependence with various insurance policies, some containing savings and investment features Some offer investment and retirement planning, as well
Finance companies (NDI)
Provide loans to customers and small businesses Short and intermediate terms with higher rates than most other lenders charge
Consumer credit
Refers to the use of credit for personal needs (except a home mortgage) Based on trust in peoples ability and willingness to pay bills when due
Certificate of deposit (CD's)
Requires a certain amount to be left on deposit for a stated time period. To earn a specified interest rate.
Types of financial services
Savings, payment, borrowing
The different types of costs that are associated with the cost of renting
Security deposit Utilities Renters insurance
Find and evaluate a property to purchase (S2)
Select your location Consider using a real estate agent Conduct a home inspection
Credit card companies (NDI)
Specialize in funding short term retail lending
Some disadvantages of using consumer credit to make purchases
Temptation to overspend Failure to repay may result in loss of income, valuable property, and your good reputation Credit cost money, and paying for purchases over a period of time is more costly than paying with cash
Simple interest
The interest computed on the principle only and without compounding Interest = Principle x rate x time
Annual percentage rate (APR)
The percentage cost (or relative cost) of credit on a yearly basis
Annual percentage yield (APY)
The percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day period (Interest amount / Principle) * 100
What it means to have a credit score
This summarizes your credit history and helps creditors predict how likely it is you will repay loan and make timely payments
Savings and loan associations (S&L) (DI)
Traditionally specialized in savings accounts and mortgage loans Have expanded to offer financial services, comparable to those of a bank
Unit pricing
Uses a standard unit of measurement to compare the prices of packages of different sizes
Many benefits of buying a vehicle
You have ownership over the vehicle No hidden costs for moving states or turning the car in early No need for banks or dealerships if enough money is saved up
Compound interest
Interest earned on interest The result of reinvesting interest, or adding it to the principle sum of a loan or deposit
Determine homeownership needs (S1)
Assess types of housing units Calculate the amount you can afford
Deposit institutions
Commercial banks Savings and loading associations (S&L) Mutual savings banks Credit unions
Lease for a motor vehicle
Contractual agreement with monthly payments for the use of an automobile over a set time., Typically three, four, or five years
Mortgage companies (NDI)
Are organized primarily to provide loans for home purchases
Credit unions (DI)
Are user owned, nonprofit, cooperative, financial institutions that are organized for the benefit of their members Lower fees and lower loan rates, with higher satisfaction levels, compared to other financial institutions
Close the purchase transaction. (S5)
Arrange a closing date Obtain funds and documents for closing Request clarification for unclear aspects of the transaction