FIN 381 Exam #2 (ch 6-10)
Declaring personal bankruptcy (7.5)
*Chapter 7 bankruptcy: personal or "straight" bankruptcy in which many debts are forgiven. *Chapter 13 bankruptcy: voluntary plan that a debtor w/ regular income develops and proposes to a bankruptcy court. -during period plan, debtor makes regular payments to a ch 13 trustee which are then distributed to creditors
Types of credit (6.2)
*Closed-end credit: one-time loans that the borrower pays back in a specified period of time and in payments of equal amounts. EX) mortgage loans, automobile loans, installment loans for purchasing furniture or appliances Three most common types: +Installment sales credit: allows you to receive merchandise, high $ items such as large appliances or furniture. Must make down payment and usually sign contract to repay, plus interest and service charges, in equal installments over a specified period. +Installment cash credit: direct loan of $ for personal purposes, home improvements, or vacation expenses. No down payment, make payments in specified amount over set period. +Single lump-sum credit: loan that must be repaid in total on a specified day, usually within 30 to 90 days. Generally used to purchase a single item. *Open-end 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. EX) departments store & bank cards (Visa, MasterCard), Travel & Entertainment cards (Diners Club, American Express), overdraft protection *Revolving check credit (Bank Line of Credit): prearranged loan from a bank for a specified amount. *Convenience users: credit card users that pay off their balances in full each month (About half of users). *Home equity loan: based on the difference between the current market value of a home and the amount the borrower owes on the mortgage. -usually set up as a revolving line of credit: arrangement whereby borrowings are permitted up to a specified limit and for a stated period (usually 5-10 yrs). Once line of credit is established, you can draw from it only the amount you need at any one time.
Home insurance cost factors (10.4)
*Coinsurance clause: policy provision that requires a homeowner to pay for part of the losses if the property is not insured for the specified percentage of the replacement value. -few companies still use, most require full coverage Insurance companies base claim settlements on one of two methods: *Actual cash value (ACV): method in which insured receives payment based on current replacement cost of damaged or loss item, less depreciation. *Replacement value: method in which the insured receives the full cost of repairing or replacing a damaged or lost item. -costs about 10-20% more
Consumer credit counseling service (7.4)
*Consumer credit counseling service (CCCS): local, nonprofit organization that provides debt counseling services for families and individuals w/ serious financial problems.
What is consumer credit? (6.1)
*Consumer credit: use of credit for personal needs.
Measuring your credit capacity (6.3)
*Debt Payments-to-Income Ratio: (monthly debt payments / net monthly income) -doesn't include house payment bc it is a long term liability -suggested to spend no more than 20% of your net (after-tax) income eon consumer credit payments *Debt to Equity Ratio: (total liabilities / net worth ) -don't include value of home and amount of its mortgage -if ratio is close to 1, you've probably reached the upper limit of debt obligations -ratio for business firms typically .33-.5 *Credit bureaus: agency that assembles credit and other info about consumers. Three major ones: Experian, TransUnion, Equifax What is in your credit files? Name, address, social, bday. May also include: employer, position, income, former address, former employer, spouse info, whether you own a home rent or board, and checks returned for insufficient funds. *Fair credit reporting act (1971): regulates use of credit reports, requires deletion of obsolete info, gives consumers access to their files. Time limits: Most info in credit file -> 7 yrs If declared bankruptcy -> 10 yrs Unpaid tax liens -> 15 yrs
Applying for credit (6.4)
*Equal credit opportunity act (ECOA): bans discrimination in the extension of credit on basis of race, color, age, sex, marital status and other factors. The 5 C's of credit management Most lenders build their policies around these: *Character: borrower's attitude towards their credit obligations. *Capacity: borrower's financial ability to meet credit obligations. *Capital: borrower's assets or net worth. *Collateral: valuable asset pledged to ensure loan payments. *Conditions: general economic conditions that can affect a borrower's ability to repay a loan. Other contributing factors: +Age, public assistance, housing loans, FICO & Vantage-score.
Avoiding and correcting credit mistakes (6.5)
*Fair credit billing act (1975): sets procedures for promptly correcting billing mistakes, refusing to make credit card payments of defective goods, and promptly crediting payments. If there is a dispute or more info is needed in regards to a billing error, notify creditor in writing within 60 days after bill was mailed. -creditor must acknowledge your letter within 30 days, unless it can be corrected sooner. -within 2 billing periods, but in no case longer than 90 days, either your account must be corrected or must be told why creditor believes bill is correct If someone has stolen your identity: 1) Contact fraud department of each of the 3 major credit bureaus 2) Contact creditors for the accounts that've been tampered w/ or opened fraudulently 3) File a police report
Managing your debts (7.3)
*Fair debt collection practices act (FDCPA) (1978): regulates debt collection activities. -doesn't apply to creditors who collect debt themselves
Automobile insurance coverages (10.5)
*Financial responsibility law: state legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by a automobile accident. Motor vehicle bodily injury coverages *Bodily injury liability: covers risk of financial loss due to legal expenses, medical costs, lost wages, & other expenses. *Medical payments coverage: covers medical expenses for people injured in ones car or as a pedestrian *Uninsured motorist protection: covers cost of injury to a person and member of his family caused by a driver with inadequate insurance or by a hit and run driver. *No fault insurance: program in which drivers involved in accidents collect medical expenses, lost wages, and related injury costs from their own insurance companies. Motor vehicle property damage coverages *Property damage liability: protects. person against financial loss when the person damages the property of others. *Collision: pays for the damage to the insured's car when it is involved in an accident. *Comprehensive physical damage: covers financial loss from a vehicle caused by a risk other than collision. EX) fire, that, glass breakage, hail, vandalism
Consumer buying activities (8.1)
*Open dating: AKA expiration date *Rebate: partial refund of the price of a product Warranties *Express warranty: created by seller/ manufacturer & has two forms..... 1) Full warranty: states that a defective product can be fixed or replaced during a reasonable amount of time. 2) Limited warranty: covers only certain aspects of the product. *Implied warranty: covers a products intended use or other basic understandings that are not in writing. EX#1) Implied Warranty of Title: indicates the seller has the right to sell the product EX#2) Implied warranty of merchantability: guarantees that a product is fit for the ordinary uses for which it is intended. *Service contracts "extended warranties": agreement between a business and consumer to cover repair costs of a product. -not warranties.
Insurance and risk management (10.1)
*Policy: written contract for insurance. *Premium: amount of money a policyholder is charged for an insurance policy. *Policyholder: a person who owns an insurance policy. Types of risk *Peril: the cause of a possible loss. *Hazard: factor that increases the likelihood of loss through some peril. Most common types: personal, property, liability -also called "Pure" risks or "insurable" risks *Speculative risk: risk that carries a chance of either a loss or gain. EX) starting a small business Risk management methods 1) Risk avoidance 2) Risk reduction 3) Risk assumption 4) Risk shifting -most common (means to transfer it to an insurance company) Planning an insurance program 1) Set insurance goals 2) develop a plan to reach your goals 3) Put your plan into action 4) Check your results
Automobile insurance costs (10.6)
*Rating territory: place of residence used to determine a persons automobile insurance premium. *Driver classification: category based own drivers age, sex, marital status, driving records, driving habits. -used to determine insurance rates *Assigned risk pool: consists of people who are unable to obtain automobile insurance due to poor driving or accident records and must obtain coverage at high rates through a state program that requires insurance companies to accept some of them.
Legal options for consumers (8.4)
*Small claims court *Class action suits: legal action taken by a few individuals on behalf of all of the people who have suffered the same alleged injustice.
Property and liability insurance (10.2)
*Strict liability: situation in which person is held responsible for intentional or unintentional actions. *Vicarious liability: situation in which a person is held legal responsible for the actions of another person.
The cost of credit (7.2)
*Truth in lending law (1969): federal law that requires creditors to disclose the APR and finance charge as a dollar amount. Finance charge: total dollar amount you pay to use credit. APR: % cost of credit on a yearly basis. 2 x n x I / P(N+1) Calculating the cost of credit *Simple interest = (P)rincipal x (r)ate x (T)ime *Declining balance method: method of computing interest when more than one payment is made on a simple interest loan. -most credit unions use this method *Add-on interest method: method of computing interest in which interest is calculated on the full amount of the principal. -as the # of payments increase, the true interest rate or APR also increases Cost of open-end credit *Adjusted balance method: creditors add finance charges after subtracting payments used during the billing period. *Previous balance method: creditors give you no credit for payment made during the billing period. *Average daily balance method: "fairest method" credits add your balances for each day in the billing period and then divide by the # of days in the period. *Rule of 78s ("sum of digits"): mathematical formula to determine how much interest has been paid at any point in a loan term. -favors lenders, dictates that you pay more interest at the beg. of loan, when you have the use of more money, & pay less & less interest as the debt is reduced *Credit insurance: any type of insurance that ensures repayment of a loan I n the event the borrower is unable to repay it. Three types: credit life, credit accident & health, credit property
Chapter 7
Choosing a source of credit: the costs of credit alternatives
Chapter 8
Consumer purchasing strategies and legal protection
Home and property insurance (10.3)
Homeowners insurance coverages +House and other structures +Additional living expenses -pays for the cost of living in a temporary location while home is being repaired +Person property -household belongings (furniture, appliances and clothing) are covered of damage or loss up to a portion of the insured value of the home. Usually 55, 70, 75% *Personal property floater: additional property insurance to cover the damage or loss of a specific item of high value. *Household inventory: list or other documentation of personal belongings, w/ purchase dates and cost info. -in the event of damage or loss, must provide +Personal liability and related coverages *Umbrella policy "personal catastrophe policy": supplements personal liability coverage. *Medical payments coverage (homeowner): home insurance that pays the cost of minor accidental injuries on ones property. +Specialized coverages *Endorsement: addition of coverage to a standard insurance policy. EX) earthquake Home insurance policy forms +Special form (all risk) = HO-3 +Tenants form = HO-4 +Comprehensive form = HO-5 +Condominium form = HO-6 +Country home form = HO-7
Renting your residence (9.2)
Housing rental activities 1) The search 2) Before signing a lease 3) Living in rental property 4) At the end of the lease
Sources of consumer credit (7.1)
Inexpensive loans: parents, family members, borrowed on financial assets held by a lending institution EX) CD, certain types of federal financial aid EX) Stafford loan -typical interest only interest they would've earned if $ was not loaded (sometimes as low as 1%) Medium-priced loans: loans from commercial banks, federal savings banks, and credit unions -typical interest 5-7% Expensive loans: finance companies, retailers, and banks through credit cards -typical interest 8-20% LOOK OVER EXHIBIT 7-1 pg 234
Chapter 6
Introduction to consumer credit
Major consumer purchases: buying motor vehicles (8.2)
Phase 1- Preshopping activiites +problem identification +info. gathering Phase 2- Evaluating alternatives +selecting vehicle options -optional equipment for cars may be viewed in 3 categories: 1) mechanical devices: to improve performance. 2) Convenience options: ex power seats, sound systems, power locks, tinted glass. 3) Aesthetic: add to vehicles visual appeal. +Comparing used vehicles -avg used car costs $16,000 less +Leasing motor vehicle -when leasing, you arrange for dealer to sell the vehicle through a financing company. Be sure to know the true cost including: 1) Capitalized cost: $ of the vehicle. 2) Money factor: interest rate being paid on the capitalized cost. 3) Monthly payment and # of payments 4) Residual value: expected value of vehicle at the end of the lease. Phase 3- determining purchasing price Two factors for effective negotiation: 1) having all the necessary info. about the product and buying situation 2) dealing w/ a person who has the authority to give you a lower price such as business owner or manager. +Price bargaining for new cars *Sticker price: suggested retail price *Dealers cost "invoice price": amount less than the sticker price. Phase 4- Post-purchase activities
Chapter 10
Property and motor vehicle insurance
Home buying process (9.3)
Step #1 Determine home ownership needs +Housing construction *Prefabricated home: components built in a factory, moved to living site. -mass production can keep costs lower. *Modular home: variation of prefabricated, completed pieces of house are transported to their new location and assembled at the site. Step #2 Find and evaluate a property to purchase Step #3 Price the property *Earnest money: portion of the price of a home that buyer deposits as evidence of good faith to indicate a serious purchase offer.
The finances of home buying (9.4)
Step #4 Obtain financing +Housing affordability and mortgage qualification amounts Step 1: Determine monthly gross income (annual income / 12) Step 2: Multiply monthly gross income by .33 or .38 if you have other debts (auto loan). Step 3: Arrive at affordable monthly mortgage payment or "A" Step 4: Divide "A" by monthly mortgage payment per $1,000 based on current mortgage rates to arrive at Affordable mortgage amount or "B" Step 5: Divide "B" by (1 - the fractional portion of your down payment) to arrive at Affordable home purchase price "C" +Evaluating points (prepaid interest) In deciding whether to take lower rate w/ more points or a higher rate w/ less points fo the following: 1) Determine dollar difference between monthly payments you will make for the two different situations. 2) Determine difference between the points charged for two different rates or at two different lenders. 3) Divide the result in step 2 by the result in step 1. This will tell you the break even point of how many months it'll take for the lower payment to offset the higher cost of the points. +The application process 1) Pre-qualification, involves completion of the mortgage application. 2) Fee payment and obtain commitment 3) Finding a property that you desire to purchase. +Fixed-rate, fixed-payment mortgages *Conventional mortgages: equal payments over 10, 15, 20, 25, 30 yrs. *Government financing programs -loans insured bye FHA and VA +Adjustable-rate (ARM), variable-payment mortgages *Rate cap: limit on the increases and decreases in the interest rate charged on an ARM *Payment cap: limit on the payment increases for an adjustable rate mortgage. +Interest-only mortgages +Other financing approaches *Buy down: interest rate subsidy from a home builder or real estate developer that reduces a home buyers mortgage payments during first few yrs of a loan. *Second mortgage "home equity loan": cash advance based on the paid-up value of a home. *Reverse mortgage: loan based on the equity in a home, provides elderly homeowners w/ tax-free income and is paid back w/ interest when the home is sold or the homeowner dies. -must be 62 to qualify -also called "home equity conversion mortgage *Refinancing Step 5: Close the purchase transaction *Closing costs: fees and charges paid when a real estate transaction is completed. *Title insurance: protects owner and lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy. *Deed: Document that transfers ownership of property from one party to another. *Escrow account: Money, usually deposited w/ the lending financial institution, for the payment of property taxes and homeowners insurance.
Resolving consumer complaints (8.3)
Step 1- Initial communication -return to place of purchase or contact online retailer -provide a detailed explanation and the ac ion you desire -be pleasant yet persistent in efforts to obtain a resolution Step 2- Communication w/ the company -send email w/ details of situation -post concerns on copays online social media -comment on a blog or consumer review website Step 3- Consumer agency assistance -seek guidance from a local, state, or federal consumer agency -determine if any laws have been violated -consider use of mediation or arbitration *Mediation: attempt by impartial 3rd party to resolve a difference between two parties through discussion and negotiation. *Arbitration: settlement of a difference by a 3rd party who's decision is legally binding. Step 4- Legal action 8.4 ->
Chapter 9
The housing decision: factors and finances
Complaining about consumer credit (6.6)
You may take legal action against a creditor. If you decide to do so, there are important credit laws you should know about: +Truth in lending & consumer acts +Equal credit opportunity act -may sue for actual damages plus punitive damages (damages for the fact that the law has been violated) up to $10,000 +Fair credit billing act -creditor that fails to comply w/ rules applying to the correction of billing errors automatically firefights amount owed on the item in question & any finance charges up to $50. May also sue for actual damages plus twice the amount for any finance charges. +Fair credit reporting act +Consumer credit reporting act (1977): places the burden of proof for accurate credit info on credit reporting agency. +Credit car accountability, responsibility, and disclosure act (2009): places new restrictions on credit card lending and eliminates certain fees.
