Chapter 07 - Using Consumer Loans

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9) Calculating an installment loan payment using the add-on method You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6%. Complete the following table. (Note: Round your answers to the nearest dollar.) What will your monthly payments be? Round your answer to the nearest cent ____________.

$545

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Poornima and Valerie are taking out installment loans for $2,500 at a stated interest rate of 8%.. The term of each loan is three years. Answer the following questions using the preceding repayment information table as necessary. Poornima: Poornima's loan uses simple interest to compute finance charges. Poornima's monthly payment rounded to the neared cent is ______________.

$78.35

5) General factors to consider when shopping for a consumer loan What are the characteristics of your reasons for feeling uneasy about Maria the loan officer? Check all that apply.

- The way the loan officer omitted pertinent information - The loan officer's embellishment of the facts - Feeling under pressure to make a decision

- loan disbursement - $8,400

- loan disbursement - $8,500

7) Calculating finance charges using the discount method and APR on a single-payment loan You are taking out a single-payment loan that uses the discount method to compute the finance charges. Computing the finance charges is done ________________________ the way they're computed using the simple interest method. Under the discount method, a borrower receives the principal __________ the finance charges. For example, if the principal is $12,000 and the finance charges are $1,920, the borrower will receive ___________________.

- the same as - less - $10,080

6) Calculating simple interest and APR on a single-payment loan You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6% 1) Finance charge 2) Total Payback

1) $540 2) $6,540

9) Calculating an installment loan payment using the add-on method 1) P is the ________________ amount of the loan. 2) r is the stated _____________ rate of interest. 3) t is the term of the loan in _________

1) principal 2) annual 3) years

9) Calculating an installment loan payment using the add-on method You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6%. Complete the following table. (Note: Round your answers to the nearest dollar.) You will make monthly payments throughout the life of the loan, in this case, _____ months.

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $2,000 for a year with a stated annual interest rate of 4%. Complete the following table. (Note: Round your answers to the nearest dollar.) APR = Average Annual Finance Charge / Average Loan Balance Outstanding = ______________________ / _______________________ = _____%

- $80 - $1,920 - 4.00

5) General factors to consider when shopping for a consumer loan You're shopping for a big loan, but you have misgivings about Darnell, the loan officer, at an institution you just visited. What are some reasons that may have you uneasy about accepting a loan there? Check all that apply.

- Darnell gave you a range of terms and said they'll be worked out at closing. - Darnell spent most of the time emphasizing benefits of loans with balloon payments and interest-only payments. - Your parents may be able to help you with the down payment, but Darnell told you to assume they will and to enter a down payment on the application including their contribution. - Darnell said that today is the only day you can secure the loan with favorable terms.

5) General factors to consider when shopping for a consumer loan What are the characteristics of your reasons for feeling uneasy about Rajiv the loan officer? Check all that apply.

- Feeling under pressure to make a decision - The way the loan officer omitted pertinent information - The loan officer's embellishment of the facts

9) Calculating an installment loan payment using the add-on method You're borrowing $6,000 for a year with a stated annual interest rate of 6%. Complete the following table. (Note: Round your answers to the nearest dollar.) 1) Finance charge 2) Total payback

1) $360 2) $6,360

4) Where to get consumer loans Loans from these institutions are in high demand but given only to those who are good credit risks. These institutions provide the most consumer loans.

Commercial banks Are the biggest sources of consumer loans. They offer a variety of loans. Their loans are in high demand so they can afford to be picky about whom they loan money to, usually people with the best credit ratings. These banks have access to inexpensive funds to loan from their depositors.

4) Where to get consumer loans These institutions are known as small loan companies with most loans for $5,000 or less

Consumer finance companies Are also referred to as small loan companies. Their borrowers typically have trouble getting loans elsewhere due to poor credit ratings and are greater risks than many other borrowers. As such, borrowers are subject to higher interest rates. To prevent these companies from taking unfair advantage of their customers, state governments set interest-rate caps on how much they can charge. Loans are usually $5,000 or less.

12) But on time or pay cash? You are going to make a substantial purchase. You have enough money to pay cash, but don't know if that's the way to make best use of your assets. Maybe you should take out an installment loan to make the purchase and invest the cash you would otherwise have used to pay for it. Use the information provided to complete the following worksheet and analyze how the numbers work out most favorably for you. For simplicity, compounding is ignored in calculating both the cost of interest and interest earnings. [Note: Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than zero (0) with a minus sign (-).] Cost of Paying Cash 9: - (5% x _____________) - $____________ Cost of Paying Cash 10: - ($_____ x _____%) - $___________ Cost of Paying Cash 11: - ($_______ x ___ years) - $___________

Cost of Paying Cash 9: - (5% x 20,000) - $1,000 Cost of Paying Cash 10: - ($1,000 x 90%) - $900 Cost of Paying Cash 11: - ($900 x 5 years) - $4,500

1) $1,600 2) $8,400 3) $10,000

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $10,000 for two years with a stated annual interest rate of 8%. Complete the following table. (Note: Round your answers to the nearest dollar.) You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate. First, compute the average annual finance charge by dividing the total finance charge of ___________ by the life of the loan, which is two years (2.0 years) = ________ (Note: Round your answers to the nearest dollar.)

- $1,600 - $800

6) Annual Percentage Rate (APR) You're borrowing $6,000 for a year with a stated annual interest rate of 6%. You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate. First, compute the average annual finance charge by dividing the total finance charge of _____________ by the life of the loan, which is a year (1.0 year) = _____________. (Note: Round your answers to the nearest dollar).

- $360 - $360

6) Calculating simple interest and APR on a single-payment loan You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6% Next, as a single-payment loan, the average loan balance outstanding is constant at $6,000. Complete the calculation. (Note: Round your answers to the nearest dollar or whole percentage point.) APR=Average Annual Finance Charge / Average Loan Balance Outstanding = ______________________ / _________________ = _______%

- $360 - $6,000 - 67%

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $10,000 for two years with a stated annual interest rate of 8%. Complete the following table. (Note: Round your answers to the nearest dollar.) APR = Average Annual Finance Charge / Average Loan Balance Outstanding = _____________________ / _____________________ = ______%

- $800 - $8,400 - 9.52%

7) Calculating finance charges using the discount method and APR on a single-payment loan You are taking out a single-payment loan that uses the discount method to compute the finance charges. Computing the finance charges is done _________________ the way they're computed using the simple interest method. Under the discount method, a borrower receives the principal _______ the finance charges. For example, if the principal is $12,000 and the finance charges are $1,800, the borrower will receive ________________.

- the same as - less - $10,200

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Clancy Clancy is somewhat of a risk taker. When he needed a loan, he believed that interest rates would fall over most of the life of the loan. Clancy most likely took out a ___________________ loan because _________________________________________.

- variable-rate - he believes his interest payments will decrease

7) Calculating finance charges using the discount method and APR on a single-payment loan The following equation computes the finance charges on your loan: Fd = Fd = P __ r __ t In the equation, FdFd is the finance charge for the loan. What are the other values? 1) P is the _____________ amount of the loan. 2) r is the stated _____________ rate of interest. 3) t is the term of the loan in ____________.

- x - x 1) principle 2) annual 3) years

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Charles and Juanita are taking out installment loans for $1,700 at a stated interest rate of 6%. The term of each loan is five years. Complete the following tables using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods used for finance charges.) Juanita - Add-On 1) Principal 2) Finance charge 3) Total payments

1) $1,700 2) $510 3) $2,210

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $31,000. The rate of interest on the loan is 18%, and you have agreed to pay back the loan in 36 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 3: Multiple your answer from Step 1 by the appropriate value from the table cell (from Step 2). This gives you a required monthly payment amount of _________________.

$1,120.65

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Paolo and Van are taking out installment loans for $3,000 at a stated interest rate of 11%. The term of each loan is seven years. Complete the following tables using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods for finance charges.) Van - Add-On 1) Principal 2) Finance charge 3) Total payments

1) $3,000 2) $2,310 3) $5,310

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Charles and Juanita are taking out installment loans for $1,700 at a stated interest rate of 6%. The term of each loan is five years. Answer the following questions using the preceding repayment information table as necessary. Juanita: Juanita's loan uses the add-on method to compute finance charges. Juanita's total finance charge rounded to the nearest cent is ___________.

$510

$530

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Poornima and Valerie are taking out installment loans for $2,500 at a stated interest rate of 8%.. The term of each loan is three years. Answer the following questions using the preceding repayment information table as necessary. Valerie: Valerie's loan uses the add-on method to compute finance charges. Valerie's total finance charge rounded to the nearest cent is ____________.

$600

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Charles and Juanita are taking out installment loans for $1,700 at a stated interest rate of 6%. The term of each loan is five years. Answer the following questions using the preceding repayment information table as necessary. Charles: Charles's loan uses simple interest to compute finance charges. Charles's monthly payment rounded to the nearest cent is ____________.

$96.65

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $10,000 for a year and a half with a stated annual interest rate of 10%. Complete the following table. (Note: Round your answers to the nearest dollar.) You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate. First, compute the average annual finance charge by dividing the total finance charge of ____________ by the life of the loan, which is a year and a half (1.5 years) = ___________ (Note: Round your answers to the nearest dollar.)

- $1,500 - $1,000

6) Calculating simple interest and APR on a single-payment loan You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6% You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate. First, compute the average annual finance charge by dividing the total finance charge of ___________ by the life of the loan, which is a year and a half (1.5 years) = ___________. (Note: Round your answers to the nearest dollar).

- $540 - $360

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $2,000 for a year with a stated annual interest rate of 4%. Complete the following table. (Note: Round your answers to the nearest dollar.) You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate. First, compute the average annual finance charge by dividing the total finance charge of ________ by the life of the loan, which is a year (1.0 year) = _________ (Note: Round your answers to the nearest dollar.)

- $80 - $80

6) Annual Percentage Rate (APR) You're borrowing $6,000 for a year with a stated annual interest rate of 6%. Next, as a single-payment loan, the average loan balance outstanding is constant at $6,000. Complete the calculation. (Note: Round your answers to the nearest dollar or whole percentage point.) APR = Average Annual Finance Charge / Average Loan Balance Outstanding = ___________________ / ___________________ = ______%

- 360 - 6,000 - 6%

5) General factors to consider when shopping for a consumer loan What are the characteristics of your reasons for feeling uneasy about Darnell the loan officer? Check all that apply.

- Feeling under pressure to make a decision - The way the loan officer omitted pertinent information - The loan officer's embellishment of the facts

2) Student Loans Fill in the blanks to provide the correct information. CRYSTAL: I think so. Interest will not start to accrue until __________________ and repaying the loan isn't scheduled to begin until ___________________________ because this loan is ______________________.

- I get out of school - I get out of school - mine, not my parents

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: Very good. Let's start completing the application for a __________________ loan. And remember, the interest payments may be tax deductible depending on ____________________________.

- Parent - your income

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Carlos Carlos took out a ten-year loan. He paid $368 every month for 120 months, until the loan was paid off. Carlos most likely took out a ___________________ loan because the monthly payment and number of payments ___________________________________________.

- fixed-rate - didn't change

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $10,000 for a year and a half with a stated annual interest rate of 10%. Complete the following table. (Note: Round your answers to the nearest dollar.) The APR is ______________________ the stated interest rate because the ______________________________________.

- higher than - Discount method was used to calculate finance charges

2) Student Loans Fill in the blanks to provide the correct information. MR. JUAREZ: Yes. Interest will start to accrue ______________________. We'll most likely be expected to begin repaying the loan _______________________________________________.

- immediately - within 60 days of receiving the funds

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $2,000 for a year with a stated annual interest rate of 4%. Complete the following table. (Note: Round your answers to the nearest dollar.) Next, as a single-payment loan, the average loan balance outstanding is constant at the ________________________, in this case, _______________.

- loan disbursement - $1,920

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $31,000. The rate of interest on the loan is 18%, and you have agreed to pay back the loan in 36 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 1: Divide the amount of the loan by 1,000. Dividing $31,000 (loan amount) by 1,000 gives you a value of ____.

2) Student Loans Fill in the blanks to provide the correct information. MRS. JUAREZ: That's okay. We're willing to accept those terms, not only because we want our daughter to concentrate on her studies rather than get another job, but also because we like knowing that the borrowing limit is ______________________________________ instead of _____________________________________.

- the cost of attendance less her current loan - a set dollar amount

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Paolo and Van are taking out installment loans for $3,000 at a stated interest rate of 11%. The term of each loan is seven years. Complete the following tables using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods for finance charges.) Paolo - Simple 1) Total payments 2) Principal 3) Finance charge

1) $4314.24 2) $3,000 3) 1,314.24

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: Ginny, I understand that you need additional aid to pay for your higher education and that your parents are willing to help you. They can apply for a _____________ loan.

PLUS

True

Valerie, whose loan used the add-on method to compute finance charges

Van, whose loan used the add-on method to compute finance charges

2) Student Loans Fill in the blanks to provide the correct information. GINNY: I'm so relieved to hear that. I have a __________________, but it just isn't enough

Stafford loan.

1) Characteristics and types of consumer loans Credit can be great to have. In some situations, having credit can even help you achieve some financial goals, but only as long as you ____________________________________. Consumer loans can be part of your credit management program.

manage your credit well

4. Where to get consumer loans These institutions are sometimes owned by companies that manufacture and sell expensive items, such as automobiles and appliances.

Sales finance companies Provide the financing for consumers who buy big-ticket items rather than the items' vendors providing it. Many companies are owned by the manufacturers of the goods but are separate entities. Their interest rates are usually higher than some other lending institutions because the dealer acts as an intermediary and expects to be paid for arranging the loan.

11) Paying off a consumer loan prior to its maturity Some installment loans include terms that charge a penalty if the borrower pays off the loan earlier than its maturity date. The specific terms can vary so it's important to know if a loan you're considering provides for a prepayment penalty and if it does, what its exact terms are. A common way to compute a penalty is the sum-of-the-digits method. Your friend didn't anticipate being able to pay off the loan before its maturity date—until she won a lot of money in the lottery, enough to pay it off. She decided to pay off the loan today rather than invest her winnings. What's the most likely reason why?

The contract does not contain a prepayment penalty clause.

11) Paying off a consumer loan prior to its maturity Some installment loans include terms that charge a penalty if the borrower pays off the loan earlier than its maturity date. The specific terms can vary so it's important to know if a loan you're considering provides for a prepayment penalty and if it does, what its exact terms are. A common way to compute a penalty is the sum-of-the-digits method. True or False: Computing interest using the sum-of-the-digits method allocates more interest at the beginning of a loan than at the end of the loan.

True

2) Student Loans Fill in the blanks to provide the correct information. CRYSTAL: I understand that I ______ expected to contribute some funds to pay for my educational expenses.

8) Calculating an installment loan payment using simple interest For an installment loan using simple interest and equal payments throughout the life of the loan, a portion of each repayment is dedicated to the principal and a portion to the interest. Remember that interest is charged only on the outstanding balance. This means that as each payment is made, more of it is allocated to _____________________________.

reducing the principal

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Paolo and Van are taking out installment loans for $3,000 at a stated interest rate of 11%. The term of each loan is seven years. Answer the following questions using the preceding repayment information table as necessary. Van: Van's loan uses the add-on method to compute finance charges. Van's total finance charge rounded to the nearest cent is ____________.

$2,310

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $15,000. The rate of interest on the loan is 9%, and you have agreed to pay back the loan in 24 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 2: Use the rate of interest and the number of o=monthly payments to identify the appropriate figure to use from the table. In this case, the rate of interest is 9%, and the loan requires 24 monthly payments. Therefore, the relevant amount from the table is ____________.

$32.40

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $31,000. The rate of interest on the loan is 18%, and you have agreed to pay back the loan in 36 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 2: Use the rate of interest and the number of o=monthly payments to identify the appropriate figure to use from the table. In this case, the rate of interest is 18%, and the loan requires 36 monthly payments. Therefore, the relevant amount from the table is ____________.

$36.15

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Paolo and Van are taking out installment loans for $3,000 at a stated interest rate of 11%. The term of each loan is seven years. Answer the following questions using the preceding repayment information table as necessary. Paolo: Paolo's loan uses simple interest to compute finance charges. Paolo's monthly payment rounded to the nearest cent is ___________.

$51.36

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $15,000. The rate of interest on the loan is 9%, and you have agreed to pay back the loan in 24 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 3: Multiply your answer from Step 1 by the appropriate value from the table cell (from Step 2). This gives you a required monthly payment amount of ___________________.

$673

- $1,000 - $8,500 - 11.76%

5) General factors to consider when shopping for a consumer loan Given the long list of relevant loan-related considerations described above, the paradox of choice often arises when attempting to make borrowing decisions. Which of the following phrases addresses the characteristics and recommended solutions for this phenomenon? Check all that apply.

- Arises when there are too many complicated choices, such you can become overwhelmed and make poor decisions - Be prepared to ask for assistance - Identify your goals and a framework for evaluating any trade-offs that must be made when making your decision

5) General factors to consider when shopping for a consumer loan You've made the decision to purchase an item that is affordable only with a loan. When shopping for a loan, there are many aspects of the loans that you should examine. Which of the following questions should be asked and answered about a specific loan proposal before accepting a lender's offer? Check all that apply

- If I accept the loan, what is my new debt safety ratio? - Does the loan have a prepayment penalty? - Do the loan's monthly payments fit in my budget? - What is the loan's APR? - What late payment charges, if any, can be accessed, and when? - What is the total cost of transaction (cost of item purchased plus cost of loan)?

5) General factors to consider when shopping for a consumer loan Your friend suggested you look into a variable-rate loan. What questions should you ask? Check all that apply.

- Is there a maximum rate? - How often is the rate subject to change? - What changes after a rate adjustment—the monthly payment amount or the number of monthly payments left on the loan? - Can I afford the maximum possible monthly payment? - What is the interest rate tied to? - How many points are added to the base rate?

5) General factors to consider when shopping for a consumer loan You're shopping for a big loan, but you have misgivings about Maria, the loan officer, at an institution you just visited. What are some reasons that may have you uneasy about accepting a loan there? Check all that apply.

- Maria spent most of the time emphasizing benefits of loans with balloon payments and interest-only payments. - Maria said that her loan was most likely the only one you'd be able to obtain. - Maria told you that the interest rate is the only important fee to worry about and that discussing the APR is an unnecessary complication. - Maria said that today is the only day you can secure the loan with favorable terms.

5) General factors to consider when shopping for a consumer loan You're shopping for a big loan, but you have misgivings about Rajiv, the loan officer, at an institution you just visited. What are some reasons that may have you uneasy about accepting a loan there? Check all that apply.

- Rajiv gave you a range of terms and said they'll be worked out at closing. - Rajiv said that today is the only day you can secure the loan with favorable terms. - Rajiv said that his loan was most likely the only one you'd be able to obtain. - When you filled out the loan application, Rajiv told you to leave out the smaller amounts you owe to department stores.b

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: Okay. Because it has the lowest interest rate and highest borrowing limit, I think I'll recommend you apply for a __________________ loan. But one word of caution: Regardless of what kind of loan you take out, it's easy to build up debt not only while in school but afterwards, even with the good job your education should help you obtain. ___________________ , legislation was passed ruling that _____________________________________ ________________________ you from the responsibility to repay person loans.

- Stafford - Recently - filing for bankruptcy protection from creditors - does not relieve

1) Characteristics and types of consumer loans Identify characteristics of a consumer loan in the following list. Check all that apply.

- Used for a one-time transaction for a specific purpose - Has a specific repayment schedule for a defined period of time and a defined amount - Used to pay for comparatively expensive and infrequent purchases - Has a formal, negotiated contract

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Paolo Paolo wanted to rent a share in a ski house for the upcoming winter, a six-month season. The house owner would not allow Paolo to pay the rent in six equal payments over the course of the ski season and, instead, required full payment up front. Paolo found an investment opportunity promising a 7% annual return. He also found a loan with a 4% annual interest rate. He decided to take out the loan to pay the landlord the full amount of the rental. Every month, Paolo planned to deposited one sixth of the loan amount (or what would have been the monthly rental payment) into the investment and take the chance that the investment would return what it promised. Paolo most likely took out _____________________ loan because he ____________________________________________.

- a single-payment - made best use of the rental money

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Megan Megan's uncle recently died. Megan will inherit enough money from her uncle to buy a new car. She doubts her current car will continue running much longer but she doesn't want additional debt payments right now. Megan took out a loan to pay cash for a new car today and will pay off the loan as soon as she receives her inheritance. Megan most likely took out ________________________ loan because she ____________________________________.

- a single-payment - only needed interim financing

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Raphael Raphael took out a loan to buy new furniture. He has a steady job and a small savings account but didn't want to pay cash for the furniture. Raphael manages his finances so that his monthly income and expenses are consistent. He doesn't expect any financial windfalls in the near or distant future. Raphael most likely took out _______________________ loan because ________________________________________.

- an installment - he can slowly but surely pay off the loan

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Amy Amy needed a loan and knew that she would be less likely to default if subject to monthly, fixed payments. Amy most likely took outa _____________________ loan because ___________________________________________.

- an installment - she only has to pay part of the loan each month

12) But on time or pay cash? You are going to make a substantial purchase. You have enough money to pay cash, but don't know if that's the way to make best use of your assets. Maybe you should take out an installment loan to make the purchase and invest the cash you would otherwise have used to pay for it. Use the information provided to complete the following worksheet and analyze how the numbers work out most favorably for you. For simplicity, compounding is ignored in calculating both the cost of interest and interest earnings. [Note: Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than zero (0) with a minus sign (-).] Based on the numbers alone, you should _________________ because: ________________________________________.

- borrow the money - If you invest the principal, you'll earn more interest than you'll pay on the loan.

6) Calculating simple interest and APR on a single-payment loan You're borrowing $6,000 for a year and a half with a stated annual interest rate of 6% The stated interest rate and APR are _____________ because the: ____________________________________________.

- equal - Simple interest method was used to calculate finance charges

6) Annual Percentage Rate (APR) You're borrowing $6,000 for a year with a stated annual interest rate of 6%. The stated interest rate and APR are __________ because the: _________________________________________________.

- equal - Simple interest method was used to calculate finance charges

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Becky When Becky took out a loan, she wanted the security of knowing what her monthly payments would be and for how long. Becky most likely took out a _________________ loan because the monthly payment and number of payments _______________________.

- fixed-rate - were not subject to change

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $10,000 for two years with a stated annual interest rate of 8%. Complete the following table. (Note: Round your answers to the nearest dollar.) The APR is _______________ the stated interest rate because the ______________________________________________.

- higher than - Discount method was used to calculate finance charges

7) Calculating finance charges using the discount method and APR on a single-payment loan You're borrowing $2,000 for a year with a stated annual interest rate of 4%. Complete the following table. (Note: Round your answers to the nearest dollar.) The APR is ___________________ the stated interest rate because the _____________________________________________.

- higher than - Discount method was used to calculate finance charges

7) Calculating finance charges using the discount method and APR on a single-payment loan You are taking out a single-payment loan that uses the discount method to compute the finance charges. Computing the finance charges is done __________________ the way they're computed using the simple interest method. Under the discount method, a borrower receives the principal _________ the finance charges. For example, if the principal is $4,000 and the finance charges are $160, the borrower will receive __________________.

- the same as - less - $3,840

3) Characteristics of single-payment or installment loans and fixed- or variable-rate loans Janet Janet needed a long-term loan, somewhere between 15 and 30 years. She learned that the longer the term, the fewer rate options she had. Janet finally had to go with the 30-year loan. Janet most likely took out a __________________ loan because ________________________________________.

- variable-rate - the long term probably assured a variable rate

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: Mr. and Mrs. Juarez, let's review a couple of the loan's terms that are different from those of Ginny's loan. First, you ________ be subject to _____________________ . And, the interest rate on your loan will be _____________ than Ginny's.

- will - an origination fee - higher

6) Calculating simple interest and APR on a single-payment loan You are taking out a single-payment loan that uses the simple interest method to compute the finance charge. You need to figure out what your payment will be when the loan comes due. The equation to calculate the finance charge is: Fs = P __ r __ t In the equation, FsFs is the finance charge for the loan. What are the other values? 1) P is the ________________ amount of the loan. 2) r is the stated ____________ rate of interest. 3) t is the term of the loan in ____________________.

- x - x 1) principle 2) annual 3) years

-1,304

1) $1,500 2) $8,500 3) $10,000

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Charles and Juanita are taking out installment loans for $1,700 at a stated interest rate of 6%. The term of each loan is five years. Complete the following tables using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods used for finance charges.) Charles - Simple 1) Total payments 2) Principal 3) Finance charge

1) $1,971.60 2) $1,700 3) $271.60

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Poornima and Valerie are taking out installment loans for $2,500 at a stated interest rate of 8%.. The term of each loan is three years. Complete the following table using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods used for finance charges.) Valerie - Add-On 1) Principal 2) Finance charge 3) Total payments

1) $2,500 2) $31.34 3) 42,531.34

10) Comparing payments on installment loans when using the simple-interestor add-on methods to compute finance charges Poornima and Valerie are taking out installment loans for $2,500 at a stated interest rate of 8%.. The term of each loan is three years. Complete the following table using all interim figures rounded to the nearest cent in your calculations. Enter all figures as positive numbers rounded to the nearest cent. (Note: The tables are slightly different to reflect the different methods used for finance charges.) Poornima - Simple 1) Total payments 2) Principal 3) Finance charge

1) $2,820.60 2) $2,500 3) $320.60

6) Calculating simple interest and APR on a single-payment loan You're borrowing $6,000 for a year with a stated annual interest rate of 6%. Complete the following table. (Note: Round your answers to the nearest dollar.) 1) Financial charge 2) Total Payback

1) $360 2) $6,360

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $31,000. The rate of interest on the loan is 18%, and you have agreed to pay back the loan in 36 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Calculate your total payment and finance charge by completing the following table. (Note: Enter all figures as positive numbers to two decimal places.) 1) Total Payments 2) Finance Charge

1) $40,343.40 2) $9,343.40

1) $540 2) $6,540

1) $80 2) $1,920 3) $2,000

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $15,000. The rate of interest on the loan is 9%, and you have agreed to pay back the loan in 24 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Calculate your total payments and finance charge by completing the following table. (Note: Enter all figures as positive numbers to two decimal places.) 1) Total Payments 2) Finance Charge

1) 16,444.80 2) 1,444.80

8) Calculating an installment loan payment using simple interest To estimate the required monthly payment amount for an installment loan, divide the amount to be borrowed by 1,000 and multiply the result by the appropriate figure from the table. Suppose that you are repaying a personal loan in the amount of $15,000. The rate of interest on the loan is 9%, and you have agreed to pay back the loan in 24 monthly payments. Using the values in the preceding table, complete the following steps to calculate the required monthly payment amount for this loan. Step 1: Divide the amount of the loan by 1,000. Dividing $15,000 (loan amount) by 1,000 gives you a value of ____.

12) But on time or pay cash? You are going to make a substantial purchase. You have enough money to pay cash, but don't know if that's the way to make best use of your assets. Maybe you should take out an installment loan to make the purchase and invest the cash you would otherwise have used to pay for it. Use the information provided to complete the following worksheet and analyze how the numbers work out most favorably for you. For simplicity, compounding is ignored in calculating both the cost of interest and interest earnings. [Note: Enter your dollar answers rounded to the nearest two cents and precede numbers that are less than zero (0) with a minus sign (-).] Cost of Borrowing 2: - ($___________ per month ________ months) - $___________ Cost of Borrowing 3: - $_____________ Cost of Borrowing 4: - $_____________ Cost of Borrowing 7: - ($___________ x _____%) - $_____________ Cost of Borrowing 8: - $_____________

Cost of Borrowing 2: - ($386.60 per month 60 months) - $23,196 Cost of Borrowing 3: - $20,000 Cost of Borrowing 4: - $3,196 Cost of Borrowing 7: - ($3,196 x 0%) - $0.00 Cost of Borrowing 8: - $3,515

4) Where to get consumer loans These are nonprofit organizations whose loan interest rates are relatively low. These institutions are owned by its members who are the only people eligible to apply for this institution's loans.

Credit unions Loans from credit unions are only available to their owner/members. As nonprofit institutions, they can offer very favorable interest rates.

11) Paying off a consumer loan prior to its maturity Some installment loans include terms that charge a penalty if the borrower pays off the loan earlier than its maturity date. The specific terms can vary so it's important to know if a loan you're considering provides for a prepayment penalty and if it does, what its exact terms are. A common way to compute a penalty is the sum-of-the-digits method. You and your friend recently took out installment loans. You expect to pay off your loan before its maturity date, so you made sure that the contract:

Does not contain a prepayment penalty clause

11) Paying off a consumer loan prior to its maturity Some installment loans include terms that charge a penalty if the borrower pays off the loan earlier than its maturity date. The specific terms can vary so it's important to know if a loan you're considering provides for a prepayment penalty and if it does, what its exact terms are. A common way to compute a penalty is the sum-of-the-digits method. True or False: Computing interest using the Rule of 78s allocates more interest at the end of a loan than at the beginning of the loan.

False

11) Paying off a consumer loan prior to its maturity Some installment loans include terms that charge a penalty if the borrower pays off the loan earlier than its maturity date. The specific terms can vary so it's important to know if a loan you're considering provides for a prepayment penalty and if it does, what its exact terms are. A common way to compute a penalty is the sum-of-the-digits method. Your friend didn't anticipate being able to pay off her loan before its maturity date—until she won a lot of money in the lottery, enough to pay it off today. However, she decided to invest all her winnings as opposed to using some of the winnings to pay back the loan and investing the rest. What's the most likely reason why?

His loan contract would use the Rule of 78s to compute interest if your friend paid off the loan before its maturity date.

Juanita, whose loan used the add-on method to compute finance charges

4) Where to get consumer loans Using these institutions is essentially borrowing from oneself. These institutions usually carry variable interest rates and need not be paid back.

Life insurance companies The law allows borrowing the cash value of an insurance policy with a life insurance company. Since the cash value is the savings portion of the policy, it already belongs to the policyholder so any use of that money is really a loan to oneself. And, since it's the policyholder's money, he or she doesn't have to pay it back. The policyholder must remember that borrowing on the cash value of the policy without paying it back reduces the insurance coverage.

2) Student Loans Fill in the blanks to provide the correct information. MR. COHEN: She's all set there. Her mother and I took out a _____________ loan to help out with the undergraduate degree. Crystal doesn't have any outstanding debt

PLUS

4) Where to get consumer loans These institutions are not high volume consumer loan lenders. These institutions mainly make mortgage loans.

Savings and loan associations Most loans made by savings and loan associations are for mortgages. While these organizations may make loans for high-cost items, such as cars, appliances, and home improvements, they don't make a big business of consumer loans.

8) Calculating an installment loan payment using simple interest The following table lists the monthly installment payment amounts required to repay $1,000 over various time framed and at various fixed-interest rates. The payment is the same each month, and the allocation between principal and interest is always ____________________.

different

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: Crystal, I understand that you wish to obtain a person loan to help with your graduate school studies. Let's take a look at a variety of loans. The first thing we need to examine is your eligibility, meaning that you ______________________________.

must demonstrate a financial need

2) Student Loans Fill in the blanks to provide the correct information. COUNSELOR: That's right. And since you've completed your undergraduate studies, I need to confirm that you meet another requirement, which is that you must _______________________________.

not be in default on other person loans

9) Calculating an installment loan payment using the add-on method The add-on method is a widely used technique for computing interest on installment loans. With the add-on method, interest is calculated by applying the stated interest rate to the ______________ balance of the loan. Finance charges using the add-on method are computed using the simple interest formula:

Chapter 07 - Using Consumer Loans

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