FIN - Chapter 7 Choosing a source of credit: the costs of credit alternatives
Looking for credit, aided by internet searches, is just as important as comparison ______ for large purchases such as automobiles, furniture, or major appliances.
- Shopping
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
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
The major provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009:
- Limits the issuer's ability to increase the interest rate in the first year - Set a consistent due date for each month - State that a teaser rate must be good for at least six months
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 is due each month - Annual fees are typically high - Full payment is due each month
The two types of credit are closed-end and free credit (TRUE/FALSE)
- 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.
- Fee
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 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
If you borrow $200 and it cost you $22 in interest with a service charge of $5, what is the finance charge?
- $27
Another very expensive way to borrow is a(n) ____ refund loan, which is possibly more expensive than a cash advance on a credit card.
- Tax
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.
- Float
Long-term financing is more costly than short-term financing becaise of higher ______ costs.
- Interest
Lender can reduce their risk by which of the following?
- Large down payment
Family members may only charge interest they would have earned on the money if they had deposited it in a ___________ account.
- Passbook
Which of the following are advantages of borrowing from a credit union?
- Patient with borrowers - Personalized service
The new Credit CARD Act requires creditors to include a warning on the monthly statement about making only the minimum ________
- Payment
Simple interest (I) is calculated as follows: ______ x Rate of Interest x Time.
- Principal
You should avoid credit when you don't need the purchase and when you can afford to pay cash to acquire the item (TRUE/FALSE)
- TRUE
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
Only about one million Americans belong to credit union (TRUE/FALSE)
- FALSE
The reason why people choose long-term financing is because it is cheaper in the long run (TRUE/FALSE)
- FALSE
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
If you have funds available on your credit card, you can obtain a cash advance from:
- A bank or credit union - An ATM
The key piece of information that credit card issuers must provide are:
- APRs - Variable rate information - Annual fees - Grace period
Before you borrow money you should ask yourself in you need a loan, if you can _____ the loan, and if you qualify for the loan.
- Afford
Which of the following types of loans are offered by life insurance companies?
- Cash value of whole life
The three types of credit insurance are:
- Credit accident and health - Credit life - Credit property
Which of the following loans are offered by credit unions to consumers?
- Credit card loans - Installment loans - Share draft loans
Which of the following statements are true?
- Credit unions may be more willing to be patient with borrowers than other lending institutions - Cash advances can be very expensive - Micro lending organizations generally offer reasonable interest rates
If you cannot make a payment on a debt when due, contact the ______ at once to work out a modified payment plan.
- Creditors
Payday loans are ______ although readily available via check cashers, finance companies, and other sources.
- Expensive
The interest rate on cash advances is often _______ than the rate on purchases.
- Higher
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/FALSE)
- TRUE
The rule of 78s is a mathematical formula to determine how much interest has been paid at any point in a loan (TRUE/FALSE)
- TRUE
Which of the following best explains the flaw in the strategy of borrowing from a finance comapny?
- When you are denied credit from traditional sources, you probably have less ability to afford the higher rate a finance company charges.
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
Credit cards are convenient, but not always better, to use than installment debt because of the latter's application process and procedures; but that ease of use can lead to overuse (TRUE/FALSE)
- TRUE
Loans from finance companies and appliance stores tend to be the highest cost loans (TRUE/FALSE)
- TRUE
Most automobile financing agreements allow the lender to repossess your vehicle when you are in default on your payments (TRUE/FALSE)
- TRUE
The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors (TRUE/FALSE)
- TRUE