Personal Financial Planning Exam 2

Which is the cheapest source of a used car (where or from whom should you buy it)?

certified pre owned, private individuals

27. Monthly nonmortgage consumer credit payments should not exceed what percent of take-home pay?

20%

What is the max percent of gross income for your mortgage payments (from perspective of most lenders)?

25-30%

Mortgage payments plus other debt payments should not exceed what percent of your gross monthly income (from perspective of most lenders)?

33-38%

39. What is the maximum loss you could be required to pay if your credit card is lost or stolen?

500

What are 529 college savings plans, and how are their earnings treated with respect to taxes?

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense Earnings on 529 accounts are not treated as taxable income. Let's say, for example, that you save $1,000 in a 529 investment account, which grows by 5% in a year to $1,050. That $50 in growth isn't taxable

What is the most important financial reason for owning a home, for most homeowners?

A security for loans

What must you do to qualify for a Perkins loan?

Apply for FASFA, A Perkins loan is a type of federal student loan based on financial need. Perkins loans are available to undergraduate, graduate, and professional students. A Perkins loan is a subsidized loan, meaning that the federal government pays the loan's interest while you are in school.

38. What is the most common method of calculating finance charges on bank credit cards?

Average Daily balance Method

1.What is depreciation of a car?

Car depreciation refers to the rate at which your car loses its value from the first year you bought it. In fact, the cost of your new car drops as soon as you drive it off the dealership lot.

What are the advantages of buying a used car rather than a new car?

Cheaper, less depreciation, better investment , afford better car It's less expensive than a comparable new car, and the recent popularity of short-term car leases has increased the availability of late-model, attractively priced used cars. It won't depreciate in value as quickly as a new car—purchasing a used car that is fewer than 18 months old often means saving the 20 percent to 25 percent depreciation in value typically experienced during that part of a car's life. Because used cars are less expensive, buyers don't have to put down as much money as they would for a new car. Today's used cars are more reliable. The quality and durability of well-maintained 2- to 4-year-old cars makes them more reliable and less expensive to maintain than the new cars of 10 years ago. The federal odometer disclosure law, requiring sellers to give buyers a signed statement attesting that the mileage shown on the odometer of their used cars is accurate, protects consumers. Penalties for violating this law are stringent.

For whom are student loans available, what limits are there on student loans, and what is true of the interest on student loans?

Direct Subsidized Loans are available only to undergraduate students who have financial need. Direct Unsubsidized Loans are available to both undergraduates and graduate or professional degree students. You are not required to show financial need to receive a Direct Unsubsidized Loan. The maximum amount you can borrow depends on factors including whether they're federal or private loans and your year in school. Undergraduates can borrow up to $12,500 annually and $57,500 total in federal student loans. Graduate students can borrow up to $20,500 annually and $138,500 total

What are the two up-front, one-time costs of buying a home?

Down payment, morgage poitns and closing costs

What are the different sources of an auto loan?

E-Loan, Auto Finance

What is a fixed rate mortgage, and how does it differ from a variable rate mortgage?

Fixed: most common is 30-years, but 15-year loan becoming more popular. Normally there is no penalty for early payment of loan, thus you can pay off a 30-year mortgage in 15 years if you wish. ´Adjustable-Rate Mortgages, rate is fixed for a period (say six months or five years) after which the rate may be changed for another term. ´Rate will be adjusted based upon an index rate ´Rates have a maximum stated as a margin between initial rate and maximum rate ´Payment may also have a cap that limits how much the payment may be increased

32. Who benefits most from a rebate credit card?

Frequent flyers, consistent use at one place

26. What should a woman do to establish her own credit history?

Open up a credit card account

A couple makes a 10% down payment on a house. What additional item will the lender require them to have because they are putting less than 20% (or more) down?

Private mortgage insurance

If a newlywed couple is only going to live someplace a short while, what advice should they follow regarding housing?

Rent

35. What type of consumer benefits most from debit cards (as opposed to credit cards)?

Security, only spend what you have, debt free, who want the convenience of a credit card but not the high cost of interest that comes with them

33. Who might have a secured credit card?

Students, new credit users, people with bad credit

What loans could one get that would not have to be repaid until after you graduate from college?

Subsidized federal loans

34. What protection from federal law does a debit cardholder have when his or her card is lost or stolen?

The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) offer protection if your credit, ATM, or debit cards are lost or stolen. Under the FCBA, your liability for unauthorized use of your credit card tops out at $50.

What does "capitalized cost" mean in an auto lease?

The price of the car

36. What are prepaid cards and how do they work?

You pay a fixed amount, which is then stored on either a magnetic strip or rechargeable microchip on the card. Each time you make a purchase, the amount is electronically deducted from the card.

2.What are the steps in the auto-buying process?

Your car's value decreases around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year

How much do cars depreciate during the first 12-18 months of their lives, normally?

Your car's value decreases around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year i.e. capitalized cost minus the residual value.

You have an open-end lease. What would cause you to have to pay additional money at the end of the lease when you turn your car back in?

if the car is worth less than the estimated residual value—the remaining value of the car at the end of the lease term—then you must pay the difference. These leases are used primarily for commercial business leasing.

You recently got a home mortgage. During the early years of the mortgage, toward what (Interest? Principal repayment?) will most of your house payment go?

interest

31. What is a prestige credit card?

lots of spending power, lots of rewards, high annual fee

What is a closed-end lease?

often called the walk-away lease, because at the end of its term you simply turn in the car, assuming that you have neither exceeded the preset mileage limit nor abused the car. This is the dominant type of lease used by consumers

25. What are some indications of overspending?

overusing, routine purchases

What is an escrow account used for?

that portion of the loan payment that goes for taxes and insurance is paid into an escrow account, where it accumulates until the lender pays property taxes and homeowner insurance premiums that are due. When you have a mortgage, you also have an escrow account that acts as a savings account that's managed by your mortgage servicer. Your mortgage servicer will deposit a portion of each mortgage payment into your escrow account to cover your estimated property taxes and insurance premiums.

28. Given a certain amount of gross income and the percent of that gross income that normally go for taxes and other deductions

use the max percent from #27 to calculate the maximum monthly consumer credit payments.

30. Will a bank start calculating and charging interest if you take a cash advance on your credit card?

yes

29. How can one avoid interest charges if using open account credit?

you can usually avoid paying interest by paying off the debt within the introductory period. Late or returned payments usually end the 0% introductory period, so always pay on time.

22. What are some appropriate reasons to use credit?

´Avoid paying cash for large outlays ´ ´Meet a financial emergency ´ ´Convenience ´ ´Investment purposes

37. What are the key items lenders look at in granting credit?

´Character—Willingness to abide by terms of loan ´Capacity—Ability to service the debt ´Collateral—Own something of value to support loan ´Capital—Unencumbered assets available ´Condition—Impact of current economy on loan

When would renting be preferred to buying (for housing)?

´Do not have funds for a down payment ´Unsettled in their jobs and family status ´Do not want the responsibility of maintenance of home ´Current prices and mortgage rates unattractive ´Can invest down payment and earn better return than owning a house

What items should one consider when evaluating refinancing a mortgage

´If rates drop by about 2 percent, you should compare the rate savings with the refinancing costs. The savings are greater than the costs, refinance.

23. What are some inappropriate reasons to use credit?

´Meet basic living expenses ´Make impulse purchases ´Purchase non-durable goods ´Consistently paying only minimum payments

24. What should one do first to establish creditworthiness?

´Not getting overextended ´Fulfilling all credit terms ´Paying on time ´Notifying creditors ifunable to pay ´Being truthful ´Open checking and savings accounts ´Get on card and make small purchases

What are the reasons for owning a home?

´Tax savings from deducting property taxes and mortgage interest, assuming you itemize deductions ´Inflation hedge: Build wealth as home appreciates in value ´Provides a stable place to live, less likely to move if own home