Chapter 7: Choosing a Source of Credit: The Cost of Credit Alternatives
Which of the following items of income and value are protected under a Chapter 7 bankruptcy?
- Household appliances - SS payments and unemployment compensation - Equity in home - Equity in cars - Trade tools
Credit card issuers must provide certain information to consumers, including:
- How to avoid paying interest - Minimum interest charge, setup and maintenance fees - Penalty APR and when it applies - APR for purchases, balance transfers, and cash advances
It is said that the least expensive way to borrow is when you borrow on the value of a financial asset. Which of the following loans would meet that test?
- Life insurance cash surrender value loan - Certificate of deposit loan
Which of the following are advantages of borrowing from a credit union?
- Personalized service - Patient with borrowers
Which of the following loans are available to consumers through commercial banks?
- Second mortgages - Credit cards - Passbook loans
The new Credit CARD Act requires creditors to include a warning on the monthly statement about making only the minimum _____
payment
There are several reasons that you should borrow from a credit union, including their patience in dealing with borrowers who have good reasons for missed payments, and they provide _____ service.
personal, personalized, quality, great, good, customer, caring, or customized
In a straight bankruptcy, many but not all _____ are forgiven.
debts, liabilities, debt, obligations, or obligation
The Fair Debt Collection Practices Act ______ to creditors that collect debts themselves.
does not apply
Shopping for credit can easily be done by
doing an internet search
A Chapter 13 bankruptcy plan can be in effect for as many as _____ years.
5 or five
Which of the following best explains why credit cards are more dangerous than installment loans?
A credit card is easier to use than taking out an installment loan.
If you cannot make a payment on a debt when due, contact the _____ at once to work out a modified payment plan. This is a one word answer.
creditor, lender, bank, or financier
Sharon has been taking out student loans to finance her college education. She has amassed a great deal of debt, but plans to declare Chapter 7 bankruptcy to have the debt forgiven. Will her strategy work?
No; student loans are not forgiven in Chapter 7 bankruptcy
What is the best strategy if you can't make a payment on a debt?
Notify the creditor as soon as possible in an attempt to work out a modified payment plan.
Passbook loans are offered by
commercial banks
In Chapter 7 bankruptcy, a debtor is required to draw up a _____ listing his or her assets and liabilities.
petition
A credit counseling organization usually provides credit management classes and helps you devise a credit management _____
plan, arrangement, scheme, or strategy
Simple interest (I) is calculated as follows: _____ X Rate of Interest X Time. This is a one word or one letter answer.
principal or P
Once you decide that you need to use credit to meet your needs, and assuming that you can afford the payments, you must _____ for the credit.
qualify, apply, or shop
Most automobile financing agreements permit your creditor to _____ your car anytime you are in default on your payments.
repossess, repo, take, reposess, or reposses
Looking for credit, aided by Internet searches, is just as important as comparison _____ for large purchases such as automobile, furniture, or major appliances.
shopping, buying, or purchasing
Another very expensive way to borrow is a(n) _____ refund loan, which is possibly more expensive than a cash advance on a credit card. This is a one word answer.
tax
Credit offered by car dealers, such as financing through ______, may be less expensive than banks, but the downside is that the car dealer may be less willing to discount the price.
the General Motors Acceptance Corporation or Ford Motor Credit Corporation
Which of the following is true about a repossession and the borrower's responsibilities after an auction sale of the vehicle by the bank?
The borrower owes the difference between the sale price and the unpaid debt plus legal, towing, and storage costs.
Finance charges can push a family over the edge of their ability to pay, especially when borrowing from one company to pay another.
True
True or false: In most cases it is less expensive to borrow money using your certificate of deposit as collateral for a loan than if you use your used car.
True
True or false: Loans from finance companies and appliance stores tend to be the highest cost loans.
True
True or false: Most automobile financing agreements allow the lender to repossess your vehicle when you are in default on your payments.
True
True or false: The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors.
True
True or false: The purpose of the Truth in Lending law of 1969 was to give consumers the information needed to compare credit costs on various loans.
True
True or false: The rule of 78ths is a mathematical formula to determine how much interest has been paid at any point in a loan.
True
True or false: You should avoid credit when you don't need the purchase and when you can afford to pay cash to acquire the item.
True
Which of the following best explains the flaw in the strategy of borrowing from a finance company?
When you are denied credit from traditional sources, you probably have less ability to afford the higher rate a finance company charges.
The interest rate on cash _____ is often higher than the rate on purchases.
advances, advance, loan, loans, or borrowing
Before you borrow money you should ask yourself if you need a loan, if you can _____ the loan, and if you can qualify for a loan.
afford, repay, or pay
A car is repossessed by a bank. The borrower owed $4,000 on the car. At an auction, the car is sold for $3,000 and the bank incurred a $150 towing charge. How much, if anything, will the borrower owe after the sale at auction?
$1,150, which is the unpaid loan balance and the towing charge
A $3,000 loan that uses add-on interest has the following terms: 6%, one year, two payments: one in 6 months and one in 12 months. What is the amount of each of these payments?
$1,590
A simple interest declining balance loan has the following terms: 8% annual interest rate, $3,000 loan, 2 payments: one at the end of the first half year and the last payment at the end of the second half year. What would be the amount of these two payments?
$1,620 and $1,560
On a discount loan of $2,000 with $75 interest, how much will you receive for loan proceeds?
$1,925
Although credit counseling is often free, some agencies will charge a set-up fee. Which of the following is a likely set-up fee for credit counseling?
$10
If you borrow $200 and it cost you $22 in interest with a service charge of $5, what is the finance charge?
$27
If you borrow $200 and it cost you $27 in interest with a service charge of $6, what is the finance charge?
$33
A $1,000 loan that uses add-on interest has the following terms: 8%, one year, two payments: one in 6 months and one in 12 months. What is the amount of each of these payments?
$540
What would be the interest cost (simple interest) for a $2,000 loan with a 6% rate for a Half of a year?
$60
You agree to pay a bank discount rate of 6% on a $1000 loan. How much will you receive from the bank when you sign the papers and receive the funds?
$940
Payday loans are {inexpensive or expensive} _____ although readily available via check cashers, finance companies, and other sources.
(in) expensive
Which of the following is generally considered to be expensive sources of loans?
- Appliance companies - Department stores - Bank credit cards - Finance companies
Which of the following are ways to lower lender risk and therefore lower the cost of borrowing?
- Choose variable interest rate - Secure a loan by property or another asset - Only create short-term payments (lower rate and higher payments) - Make a larger down payment
Which of the following loans are offered by credit unions to consumers?
- Credit card loans - Installment loans - Share draft loans
Which of the following obligations are not discharged in a Chapter 7 bankruptcy?
- Fines - Certain taxes - Alimony - Child support
The two main activities of the CCCS are:
- Helping families with debt problems by helping them manage debts - Teaching families how to avoid heavy debt burdens in the future
Which of the following types of loans are offered by consumer finance companies?
- Second mortgages - Personal installment loans
The major provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009:
- Set a consistent due date for each month - Limits the issuer's ability to increase the interest rate in the first year - State that a teaser rate must be good for at least six months
If you have funds available on your credit card, you can obtain a cash advance from:
- a bank or credit union - an ATM
The three types of credit insurance are:
- credit life - credit property - credit accident and health
The key pieces of information that credit card issuers must provide are:
- grace period - variable rate information - APRs - annual fees
Family members may only charge interest they would have earned on the money if they had deposited it in a ______ account.
passbook
One reason some people use payday loans is that
they are convenient
A reason why people tend to choose long-term financing is:
they want to make smaller monthly payments
Some credit card holders make the minimum payment to remain in good standing without making progress on reducing the outstanding balance. This is referred to as the minimum monthly payment _____
trap
The person who distributes the money to creditors is the
trustee
The costs of Chapter 13 bankruptcy include court costs, lawyer fees, and _____ fees.
trustee, trustees, or trustees'
The pros and cons of T&E credit cards, such as American Express, include:
- no finance charge is incurred as full payment of the balance owed is due each month - full payment is due each month - annual fees are typically high
Most credit cards do not have a grace period on cash advances which means:
you owe interest for every day until you repay the advance
Which of the following are signs of possible debt problems?
- using up savings - getting a credit card revoked - having little in savings - borrowing money to pay old debts
A Chapter 13 bankruptcy can be in effect for as long as _____ years.
5
A simple interest declining balance loan has the following terms: 8% annual interest rate, $2,000 loan, 2 payments: one at the end of the first half year and the last payment at the end of the second half year. What would be the amount of these two payments?
$1,080 and $1,040
Why are investors willing to pay a higher rate on loans when increased inflation is expected?
Because they expect inflation to enable them to repay the loan with cheaper dollars.
An example of a travel and entertainment card is:
Diners Club
The creditor in a Chapter 13 bankruptcy proposes a plan to pay off debts from future earnings over a period of time.
False
True or false: Family loans are simple arrangements and can benefit both parties and no documentation is recommended.
False
True or false: Most credit card companies do not charge a fee when a cash advance is made.
False
True or false: Only about one million Americans belong to credit unions.
False
True or false: The reason why people choose long-term financing is because it is cheaper in the long run.
False
True or false: The two types of credit are closed-end and free credit.
False
Lenders can reduce their risk by which of the following?
Large down payment
If you are denied credit by a bank or credit union, you should question:
your ability to afford the higher rate charged by a loan company
In a Chapter 13 bankruptcy, the debtor normally keeps _____ of the property.
all or most
The first thing a debtor must do in a Chapter 7 bankruptcy is to draw up a petition listing _____ and liabilities or debts for submission to the court.
assets
The two major categories or types of credit are _____ -end and open-end credit.
closed
Cash advances are obtained through your _____ card at a bank or through an ATM machine. This is a one word answer and found in the discussion of cash advances. This is a one word answer.
credit
Consumer finance companies do not offer
credit card loans
The most commonly purchased type of credit insurance is
credit life insurance
The Truth in Lending law of 1969 requires lenders to state the cost of borrowing as a specific _____ amount so that consumers know exactly what the credit charges are. This is a one word answer.
dollar, currency, monetary, cash, or $
Tax refund loans are a(n) ____ way to borrow money in case of a cash shortfall.
expensive
Young people who make purchases on credit for possessions that took parents years of hard work and savings is an example of using credit to have deferred comfort.
false
Cash advances require that you pay a transaction _____.
fee
Most credit cards carry a special _____, based on the percentage of the amount borrowed, that is applied when a cash advance is taken out. This is a one word answer.
fee, charge, or rate
CCCS counseling is usually
free
Credit cards can be a cheaper alternative to an installment loan if the need is short term (less than a month). This is because of the period that is often allowed by credit card companies.
grace or float
A married couple that does not talk about money could be
having debt problems
The interest rate on cash advances is often _____ than the rate on purchases. This is a one word answer.
higher, greater, bigger, larger, or more
Each 1% increase in the _____ rate means a decrease of approximately 1% in the quantity of goods and services you can purchase with a given amount of money.
inflation
Cash advances on credit cards usually accrue _____ from the moment you accept the cash.
interest
The rule of 78s formula favors ____.
lenders
Credit offered by car dealers is generally ___ expensive than most other car loans.
less
Paying the _______ makes your credit card purchases much more expensive, especially at high interest rates.
minimum monthly payment
After Chapter 13 bankruptcy, some people find obtaining credit _____
more difficult
Two situations when you should avoid credit are: when you don't _____ or really want the purchase, and when you could pay cash but choose to finance the needed item. (Enter one word per blank.)
need or require