Personal Finance Test 2

Five steps to selecting a financial institute

1. List features most important to you 2. Rank the top 3-4 features 3. List local, online, and national institutions 4. Conduct research (talk w/ friends, online research, personal visit) 5. Balance your needs with information collected

three types of closed-ended credit

1. installment sales credit 2. installment cash credit 3. single lump sum credit

Daily financial mistakes

overspending (impulse buying, using credit), insufficient liquid assets, using savings/borrowings to pay current expenses, failing to put unneeded funds in an interest bearing/investment account

Series EE

patriotic bonds sold at half of the face value; face value is $50 - $5000; interest is compounded annually; fixed interest rate; penalty if redeemed within 5 years; continues earning interest for 30 years; potential tax advantages if used pay tuition

Problematic financial businesses

pawn shops, check cashing outlets, payday loan companies, rent to own centers, car title loans

collateral

a valuable asset that is pledged to ensure loan payments

bank reconciliation

accounts for differences between the bank statement and your checkbook balance

Brokerage firms

acts as agent between the buyer and seller for stocks, bonds, and other investment securities

traveler's check

allow you to make payments when you are away from home; requires you to sign each check twice

credit bureau

an agency that collects information on how promptly people and businesses pay their bills (Experian, TransUnion, Equifax)

Service contracts

an agreement between a business and a consumer to cover the repair costs of a product; also called an extended warranty

asset/cash management account

an all-in-one account that includes savings, checking, borrowing, investing, and other financial service for a single fee

APR (Annual percentage rate)

percentage cost of credit on a yearly basis, key to comparing costs when shopping for rates

certified check

personal check with guaranteed payment

Mortgage companies

provides home mortgage loans

prime rate

rate banks charge large corporations

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 year

credit report

the record of your complete credit history

Arbitration

the settlement of a difference by a third party whose decision is legally binding

finance charge

the total dollar amount you pay to use credit

Debt to equity ratio

total liabilities/ net worth (less than one)

Inexpensive loans

borrowing from parents or family members

Loans

borrowing money with an agreement to repay along with interest within a certain amount of time

Payday loan companies

cash advances; check advances loan; post-dated check loans; delayed-deposit loans; higher interest rates

the five Cs of credit

character, capacity, capital, collateral, conditions

Check cashing outlets

charge 1-20% of checks face value; 1-3% is average; aka currency exchanges

Savings and loan associations

checking accounts, specialized savings plans, loans and financial planning, and investment services

New Car Warranties

coverage of basic parts against defects; power train converge for the engine, transmission, and drive train; and corrosion warranties

Implied warranty

covers a product's intended use or other basic understandings that are not in writing

rate of return/yield

earnings on savings; frequency of compounding increases return

I-bonds

earns a fixed rate plus an inflation rate; twice a year inflation adjustment

Expensive loans

finance companies and retail stores that lend to consumers will frequently charge high interest rates, ranging from 12-25 %

simple interest

interest compounded on principal only and without compounding

debt payments to income ration

monthly debt payments/ net monthly income (consumer credit payments should not exceed a maximum of 20% of your net income)

Series HH

no longer sold; current income bonds; pays interest every 6 months; interest direct deposited and taxed as current income

legal aid society

one of a network of publicly supported community law offices that provide legal assistance to people who cannot afford their own attorney

Closed-ended credit

one-time loans, for specific purpose, that you pay back in a specified period of time, and in payments of equal amounts (student or car loans)

Commercial Banks

organized as corporations; offer a full range of services including checking, savings, lending, and other services

line of credit

the maximum dollar amount of credit the lender has made available to you

Credit

An arrangement to receive cash, goods or services now and pay for them in the future

Types of endorsements

Blank endorsement (signature only), restrictive endorsement (for deposit only), special endorsement (pay to the order of)

Deposit Financial Institutions

Commercial banks, savings and loan associations, mutual savings banks, credit unions

FDIC

Federal Deposit Insurance Corporation

Capitalized Cost

Price of vehicle

US Savings bonds

Series EE, Series HH, I-bonds

Financial services research

Services offered, fees disclosure, minimum balance, savings rate sheet, simple loan application, sufficient deposit insurance

promotional CD

a CD that attempts to attract savers with gifts or special rates

stock-indexed CD

a CD that has earnings based on the stock market with higher earnings in times of strong stock performance

bump-up/rising-rate CD

a CD that has higher rates at various intervals (ex. a couple months)

callable CD

a CD that starts with higher rates and long-term maturities

cashier's check

a check of a financial institution

Money market funds

a combination savings-investment plan offered by investment companies; not covered by FDIC

leasing

a contractual agreement with monthly payments for the use of an automobile over a set time period, typically 3-5 years

small claims court

a court that settles legal differences involving amounts below a set dollar limit; usually takes place without a lawyer

FICO

a credit score company; scores between 350-850, higher score = less risk

Chapter 13 bankruptcy

a debtor with a regular income proposed a plan for using future earnings or assets to eliminate his or her debts over a period of time

installment cash credit

a direct loan of money for personal purposes, home improvements, or vacation expenses

class-action suit

a legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice

trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another

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 (credit cards)

installment sales credit

a loan that allows you to receive merchandise, usually high-priced items such as large appliances or furniture

single lump-sum credit

a loan that must be repaid in total on a specified day, usually within 30 to 90 days

credit rating

a measure of a person's ability and willingness to make credit payments on time

interest

a periodic charge for the use of credit

revolving check credit

a prearranged loan for a specified amount that you can use by writing a special check

money market account

a savings account that requires a minimum balance and has earnings based on the changing market level of interest rates

Certificates of deposit (CD)

a savings plan requiring that a certain amount be left on deposit for a stated period to earn a specific interest rate

money factor

the interest rate being paid on the capitalized cost

compounding

interest that is earned on previously earned interest

Rent to own centers

lease merchandise at high interest rates to low income consumers

Non-deposit financial institutions

life insurance companies, investment companies, brokerage firms, credit card companies, finance companies, mortgage companies

Home equity loans

loan based on your home equity (current market value of your home minus the amount you still owe on the mortgage) interest is tax deductible, used only for major purposes

Pawn shops

loans on possessions; higher fees, 3% per month common; used for quick cash

Medium priced loans

loans with moderate interest rates from commercial banks, savings and loans associations, and credit unions

money order

may purchase from financial institutions, post offices, and stores

Fair Credit Billing Act (FCBA)

sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments

Mutual savings bank

specialized in savings accounts and mortgage loans; owned by their depositors with profits going back to depositors by paying a higher rate on savings

Credit card companies

specializes in short-term retail lending

Chapter 7 bankruptcy

straight bankruptcy in which many, but not all, debts are forgiven; most of the debtor's assets are sold to pay off creditors

principal

the amount borrowed

capital

the amount of your assets that exceed your liabilities, or the debts that you owe

payment schedule

the amount paid monthly and the number of payments

Mediation

the attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation; nonbinding

capacity

the borrower's ability to pay additional debts

character

the borrower's attitude toward his or her credit obligations

residual value

the expected value of the vehicle at the end of a lease

conditions

the general economic conditions that can affect a borrower's ability to repay a loan, such as unemployment and recession

Price Comparison

unit pricing= the standard unit of measure, coupons and rebates; large is not always best to buy; sales prices are not always savings; online sources can save time; more convenient or ready to use is higher priced

interest rates rise

use long term loans to take advantage of current low rates; select short term savings instrument to take advantage of higher rates when they mature

Consumer credit

use of credit by individuals for personal needs, except home mortgage; major force in our economy

interest rates fall

use short term loans to take advantage of lower rates when you refinance the loans; select long term savings instruments to "lock in" earnings at current high rates

Credit unions

user-owned; non-profit, provide comprehensive financial services; lower fees; lower loan rates

Express Warranty

usually in writtenform, created by the seller or manufacturer; has two forms: full warranty or limited warranty

Warranty

written guarantee, from manufacturer or distributor specifying the conditions under which the product can be returned, replaced, or repaired