FIN 207 exam #3

How do inflation and taxes affect earnings on savings?

Inflation and taxes reduce the real rate of return earned on savings.

What are the two key concepts to remember when you borrow money?

The finance charge, and the annual percentage rate

What are the main sources of money for a down payment?

The main sources of a down payment are personal savings, pension plan funds, investments, and assistance from relatives

What are the main types of savings plans offered by financial institutions?

The main types of savings plans are regular savings accounts, certificates of deposit, interest-earning checking accounts, money market accounts, money market funds, and U.S. savings bonds.

What are the major sources of consumer information?

The major sources of consumer information are personal contacts, business organizations, media information, independent testing organizations, online sources, and government agencies

limited warranty

usually in a written form

What are the main benefits and drawbacks of renting a place of residence?

Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are few financial benefits, restricted lifestyle, and legal concerns

Why is consumer credit important to our economy?

All economists now recognize consumer credit as a major force in the American economy. Any forecast or evaluation of the economy includes consumer spending trends and consumer credit as a sustaining force. To paraphrase an old political expression, as the consumer goes, so goes the U.S. economy

How do changing interest rates affect the amount of mortgage a person can afford?

As interest rates decline, home buyers can afford to take on a larger mortgage

What factors affect the selling price of a home?

Home prices are affected by location, size, condition, features, and current market demand

What actions are appropriate when buying a used car?

Identify sources of used vehicles, research and compare prices, condition of vehicle, and options

How does a money market account differ from a money market fund?

A money market account is a savings account at a bank or other insured financial institution, usually with a minimum balance, earning a rate that varies based on current interest rates. A money market fund is a savings-investment plan with an investment company

How does a service contract differ from a warranty?

A service contract is a paid agreement for repairs. A warranty is a feature offered by a manufacturer or distributor

The following abbreviations appeared in an ad for selling used cars. Interpret these abbreviations.

AC: air conditioning pwr mrrs: power mirrors ABS: anti-lock braking system P/S: power steering

Prepare a list of actions to take when selling a home.

Actions might include presenting the home for sale in an appealing manner. Making necessary repairs and painting areas. Obtain assistance in setting the selling price. Deciding whether to sell the home on your own or to use the services of a real estate agent

List advantages and disadvantages of using credit.

Advantages: you can enjoy goods and services when your funds are low and pay for them later; you can combine several purchases into one monthly payment; you have record of your expenses; you can stop payment on purchases of defective items; you can travel more safely without carrying a lot of cash; sometimes you need credit cards to make hotel reservations or purchases over the phone. Disadvantages: credit costs money; there is a temptation to overspend

Under what conditions might an adjustable-rate mortgage be appropriate?

An adjustable rate mortgage may be appropriate when interest rates are relatively high and they are expected to decline. This situation would benefit the borrower as rates decline, or the homeowner may refinance when rates drop at a lower-rate, fixed-rate mortgage.

What is a credit bureau?

An agency that collects information on how promptly people and businesses pay their bills.

Collateral

An asset pledged to ensure timely loan payments

What are some common mistakes a person might make when renting an apartment or other housing?

Answers may include not comparing rental units and living costs, not reading and understanding the lease, not having renters' insurance, and not caring for the rental unit and losing the security deposit.

What relationship exists between changing interest rates and the rates of return for various savings accounts, money market accounts, and certificates of deposit of various lengths?

As overall interest rates increase in the economy, savers can expect higher rates of return. Often these saving rates do not rise as quickly as expected. In general, larger amounts in an account and longer time in which savings are kept on deposit will result in higher rates of return.

Based on the following information, determine the true balance in your checking account.

Based on the following information, determine the true balance in your checking account. Balance in your checkbook, $356 Balance on bank statement, $472 Service charge and other fees, $15 Interest earned on the account, $4 Total of outstanding checks, $187 Deposits in transit, $60 Bank balance $472 - outstanding checks $187 + deposit in transit $60 = $345 Checkbook balance $356 + interest earned $4 - service charge/fees $15 = $345

What are the two types of consumer credit?

Closed-end and open-end are two types of consumer credit. With closed-end (or installment-credit, the borrower pays back a one-time loan in a specific number of payments in a specific period of time. With open-end credit, or revolving credit, the borrower is permitted to take loans on a continuous basis and is billed for partial payments periodically. The three most common types of closed-end credit are installment sales credit, installment cash credit, and single lump-sum credit. Examples of open-end credit include convenience credit, incidental credit, revolving credit, and credit cards. Only individual or family circumstances will dictate if one type of credit is better than another.

Closed-end credit

Closed-end credit One-time loan paid back in a specified time in payments of equal amounts

What are the major sources of Medium-priced Loans

Commercial banks Savings and Loans Credit Unions

In what situations can comparing prices help in purchasing decisions?

Comparing prices can be helpful when buying expensive or complex items, when competing brands are available, when different package sizes are available, and when product quality varies.

What is consumer credit?

Consumer credit refers to the use of credit for personal needs (except a home mortgage) by individuals and families

How has online banking changed the way consumers select and use various financial services?

Consumers expect more convenience, instant access to account information, higher savings rates of return, lower loan costs, and lower banking service fees. They can easier obtain these if time is taken to compare various online sources of banking services.

What types of brands are commonly available to consumers?

Consumers have a choice of brand-name, store-brand, and private-label products

What actions would you recommend to someone who was considering using the services of a pawnshop, check-cashing outlet, or payday loan company?

Contact other financial institutions (such as a bank or credit union) in an attempt to obtain information about low-cost services that might be offered. Compare costs at several financial institutions. Talk with other people to obtain information about their experiences at various financial institutions.

Write the steps you should take if you are denied credit.

Contact the credit bureau and ask for a copy of your credit report. Ask the bureau to investigate any inaccurate or incomplete information and correct its records

What are the major sources of Expensive Loans

Finance Companies Retail Stores Credit cards

Capacity

Financial ability to meet credit obligations

What maintenance activities could increase the life of your vehicle?

Frequent oil changes, regular tune-ups, and checking belts, hoses, and fluids regularly can minimize major repairs and maximize vehicle life.

Conditions

General economic conditions that affect your ability to repay a loan

What actions would you recommend to a person who was considering buying a home that needed several improvements?

Have a home inspection to make sure the needed repairs are not more severe than they appear. Obtain estimates for the cost of the repairs. Determine the time and cost involved if you plan to do the repairs yourself

Describe situations in which you might use the services of a lawyer.

If a consumer situation is complicated or involves a large sum of money, the use of a lawyer may be appropriate. Situations might include a product injury case, settling an estate, purchase of real estate, adoption of a child, or a divorce

What should you consider when deciding whether to sell your home on your own or use the services of a real estate agent?

If you decide to sell by owner, you will need to price, advertise, and show the house. Some people would like to save money by taking on these tasks and not use a real estate agent. If you would like someone else to handle these and other duties, you may decide to use the services of a real estate agent

Distinguish between Chapter 7 and Chapter 13 bankruptcy

In Chapter 7 bankruptcy, a debtor is required to draw up a petition listing his or her assets and liabilities. The debtor submits the petition to a U.S. district court and pays a filing fee. A person filing for relief under bankruptcy code is called a debtor; the term bankrupt is not used. In Chapter 13 bankruptcy, a debtor with a regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time. In such bankruptcy, the debtor normally keeps all or most of his or her property.

What is the difference between a credit card and a debit card?

A credit card extends credit and delays your payment. A debit card electronically subtracts money from your savings or checking account to pay for goods and services at the time of purchase

Samuel applied for a loan to purchase a new car. His application was denied. What should he do now?

Samuel has the right to know the reason that his application was denied. If it was due to an item on his credit report, he is entitled to know the specific information that led to the denial. He can receive a copy of his credit report free of charge as long as the request is made within 60 days of the denial.

Diane wants to purchase a home in the next five years. She knows how important a good credit score is for getting a lower interest rate. What are some ways she can continue to improve her credit score over the next few years?

She should review the 5 C's of credit to ensure that she would make a good loan candidate. Additionally, she should repay any outstanding loan balances. She should also request a copy of her credit report and ensure that all of the items are accurate before applying for a mortgage

In what types of situations would small claims court and class-action suits be helpful?

Small claims court is helpful for minor consumer problems that require legal action. Class action suits can provide legal assistance to a group with the same consumer complaint

Which components of a lease are likely to be most negotiable?

Some people will tell you that just about everything in a lease is negotiable; however, certain things are likely to be more flexible than others. Most negotiable items include rent, amount of security deposit, starting date of lease, and decorating

While fraud usually involves deceptions against consumers, what are some "frauds" that consumers commit against business?

Student answers may include returning purchases as new after using the item or wearing the clothing, using expired coupons, eating food items in stores without paying for the item, buying an item in one store at a low price and returning at another store for a higher price, shoplifting

Describe how advertisements, news articles, online sources, and personal observations might be used to make wiser buying decisions.

Student answers will vary based on information collected. Encourage students to explain actions that result in wise buying habits

What do you believe are the most important factors a person should consider when selecting housing?

Student answers will vary. Encourage students to consider both their financial situation and personal factors.

Alka plans to spend $5,000 on plasma television and home theater system. She is willing to spend some of her $9,000 in savings. However, she wants to finance the rest and pay it off in small monthly installments out of the $400 a month she earns working part-time. How might she obtain a low interest rate and make low monthly payments?

Students' answers will vary. A possible answer is that Alka can get a low interest rate by making a large down payment and a small installment payment by spreading the payments over a long period.

What are the three major trade-offs you should consider as you take out a loan?

Term versus interest cost, lender risk versus interest rate, and cost of your loan.

What are the advantages and disadvantages of owning a home?

The advantages of owning a home are pride of ownership, financial benefits, and lifestyle flexibility. Disadvantages are financial uncertainty, limited mobility, and higher living costs.

Capital

The borrower's assets or net worth

Character

The borrower's attitude toward his or her credit obligations

Line of credit

The dollar amount that a lender makes available to a borrower

What factors affect a person's ability to qualify for a mortgage?

The major factors that affect mortgage affordability are income, other debts, the amount available for a down payment, the length of the loan, and current mortgage rates

How can the quality of a school system benefit even homeowners in a community who do not have school-age children?

The quality of a school system is an important factor affecting home prices in a community. By maintaining quality schools, all homeowners in an area benefit from stable and increasing property values

What actions are recommended when planning to sell your home?

When planning to sell your home, make needed repairs, consider new paint, clear out living and storage areas, and remove unnecessary furniture and other items

What factors are commonly considered when selecting a checking account?

When selecting a checking account consider restrictions (such as minimum balance and holding period for deposited checks), fees and charges, special features, and interest earned.

Open-end credit

A line of credit in which loans are made and repaid on a continuous basis.

Describe how knowledge of current interest rates would help you better plan when obtaining a mortgage.

Knowledge of current interest rates could mean obtaining a better mortgage rate by timing your home purchase to avoid high rates and to take action when rates are lower

What are the major sources of Inexpensive Loans

Parents Family members Friends

When using the research-based approach for purchasing described in this chapter, which actions do you believe are overlooked by most shoppers?

Student answers may include not clearly defining the problem, not seeking information from several sources, not comparison shopping, not identifying several alternatives, and not carefully analyzing the alternatives.

Finance charge

The total amount paid to use the credit

(a) What are potential benefits of an "overdraft protection" service for your checking account? (b) What costs should a person consider before deciding to use the "overdraft protection" service?

(a) High overdraft fees can be avoided; a person would always have enough funds in the account. (b) The fee for this advance might be very expensive; potentially high interest rate on the "loan;" a small overdraft of a dollar or two might "trigger" an advance of $50 or $100 (plus interest).

For the following situations, identify the legal action that would be most appropriate to take. (a) LEGAL AID SOCIETY (b) SMALL CLAIMS COURT (c) ARBITRATION (d) CLASS ACTION SUIT

(a) LEGAL AID SOCIETY: A low-income person wants to obtain the services of a lawyer to file a product-liability suit. (b) SMALL CLAIMS COURT: A person is attempting to obtain a $150 deposit for catering that was never returned. (c) ARBITRATION: A consumer wants to settle a dispute out of court with the use of a legallybinding third party. (d) CLASS ACTION SUIT: A group of telephone customers were overcharged by $1.10 a month over the past 22 months.

What steps would you take if someone stole your identity?

1. Contact the credit bureaus and tell them to flag your file with a fraud alert. 2. Contact the creditors and follow up in writing. 3. File a police report and keep a copy of the report

Interest

A periodic charge for the use of credit

To finance a sofa for his new apartment, Caleb signed a contract to pay for the sofa in six equal installments. What type of consumer credit is Caleb using?

Close-end Credit

What guidelines can be used to determine the amount to spend for a home purchase?

In general, a person should make payments on the purchase of a home that involve about 25 to 30 percent of his or her income. This is a guideline and could be influenced by other factors such as the amount available for a down payment and other household expenses.

When might leasing a motor vehicle be appropriate?

Leasing may be appropriate for business use or when a new vehicle is desired every few years

What fees and deductions may be overlooked when balancing your checking account?

Monthly service fees, ATM charges, check printing charges, overdraft charges

What are potential concerns associated with obtaining furniture, appliances, and other items from a rent-to-own business?

These businesses typically charge very high prices when buying the item over time with "easy, low" payments.

What is a "certified pre-owned" vehicle? What are the benefits and drawbacks of this type of purchase?

These reconditioned vehicles receive extensive servicing that brings their quality above the typical used car. While these are more expensive, the assurance of quality is a benefit.

Are checking accounts that earn interest preferable to regular checking accounts? Why or why not?

This depends on the minimum balance required to earn interest and the fees charged.

What are the two general rules of measuring credit capacity? How is it calculated?

Two general rules for measuring credit capacity are: debt payments-to-income ratio, and debt-to equity ratio. None of these methods is perfect for everyone; the limits given are only guidelines. Only you, based on the money you earn, your current obligations, and your financial plans for the future, can determine the exact amount of credit you need and can afford. You must be your own credit manager. Debt payments-to-income ratio is calculated by dividing your monthly debit payments by your net monthly income. The debt-to-equity ratio is calculated by dividing your total liabilities by your net worth.

How might you protect your credit information on the internet?

Use a secure browser, keep records of online transactions, review your monthly statements; read the privacy and security policies, keep your personal information private, never give your password to anyone on line, don't download files sent by strangers

For the following situations, select the type of home financing action that would be most appropriate: a. FIXED-RATE b. REFINANCE c. HOME EQUITY LOAN d. V-A MORTGAGE e. REVERSE MORTGAGE

a. FIXED-RATE: A mortgage for a person who desires to finance a home purchase at current interest rates for the entire term of the loan. b. REFINANCE: A home buyer wants to reduce the amount of monthly payments since interest rates have declined over the past year. c. HOME EQUITY LOAN: A homeowner wants to access funds that could be used to remodel the home d. V-A MORTGAGE: A person who served in the military, who does not have money for a down payment. e. REVERSE MORTGAGE: A retired person who wants to obtain income from the value of her home.

service contract

commonly referred to as an extended warranty

implied warranty

covers a product's intended use; may not be in writing

full warranty

covers fixing or replacement of a product for a set time period

express warranty

covers only aspects of the item purchased

Good Reasons a. A medical emergency. b. Borrowing for college education. Unnecessary Reasons a. Borrowing for everyday living expenses. b. Borrowing to finance a luxury car.

List two good reasons to borrow and two unnecessary reasons to borrow.

What are some warning signs of debt problems?

Making only the minimum monthly payments, having trouble making even the minimum monthly payment, missing loan payments, using savings to pay for necessities, receiving payment due notices, borrowing money to pay off old debts, exceeding the credit limits and being denied credit.

How does arbitration differ from mediation?

Mediation is the involvement of a third party to suggest solutions in a dispute; arbitration is a legally binding decision by a third party made once the two parties in dispute agree to the process

How can most consumer complaints be resolved?

Most consumer complaints are solved by contacting the store or company office

What are common causes of consumer problems and complaints?

Not being informed in advance of factors such as warranties, service availability, prices at various stores, or cost of installation can result in consumer complaints. Also, not asking questions and not obtaining details in writing are common causes of consumer problems

What steps might you take if there is a billing error in your monthly statement?

Notify creditor in writing, and include any information that might support your case. Pay the portion of the bill that is not in question

What factors (including psychological) would you consider in assessing the choices in declaring personal bankruptcy? Why should personal bankruptcy be the choice of last resort?

Obtaining credit may be more difficult in the future. Furthermore, there are court costs, attorney's fees, trustee's fees and other monetary costs. There are also psychological costs. Therefore, the extreme step of declaring bankruptcy should be taken only when no other options for solving financial problems exist

Why is it important to avoid the minimum monthly payment trap?

Paying the minimum payment will take much longer to repay the balance. The longer the time to repay the balance, the more interest that must be paid

What are the factors a lender cannot consider according to the law when offering credit?

Race, nationality, age, sex, marital status, public assistance