UMD FMSC 371 - Chapter 7: Consumer Loans and Credit Managements

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Chapter 7: Consumer Loans and Credit ManagementsFixed-rate loan: rate of interest remains the same throughout the term of the loan (automobiles, home equity)Variable-rate loan: rate of interest varies periodically with a changing market rate, such as the prime rate (home equity)Single-payment loan: requires the repayment of interest and principal in a single payment in the futurePrincipal: original amount borrowed or investedInstallment loan: requires repayment in equal periodic installments which include interest and principalDefault: failure to meet the terms of a loan agreement, as when payments are not made in a timely fashionAcceleration clause: loan term that requires immediate repayment of the total amount due on an installment loan that is in defaultPrepayment penalty: a fee charged to the borrower when a loan balance is repaid before the end of the loan termSecured Loan: a loan that includes a pledge of collateral; gives the lender the right to take certain assets if loan is not repaid (car loans)Collateral: valuable assets or real property that can be taken by the lender in the event of a loan defaultDeficiency judgment clause: gives lenders the right to bill you for the difference between what was owed and the value of the repossessed collateral.Lien: public notice of a right to real propertyHome Equity: the market value of a home minus the remaining mortgage balance (can usually borrow up to 75%-80% of value)Depository Institutions: financial institutions that obtain funds from deposits into checking and savings account (banks, savings and loans, credit unions)Consumer Finance Company: a nondepository institution that makes loans to riskier consumers, higher interest rates than depository institutionsSales Finance Company: a nondepository institution that makes consumer loans to buyers of products offered through its parent companyPromissory Note: legal contract that specifies the terms and conditions of the borrower’s agreement to repay a sum of moneyDown Payment: amount of the purchase price that buyer pays in cashLoan TermClosed- end credit requires repayment over a specified period of timeSecured Loan: include a description of the collateral (car loans)Unsecured Loan: credit cardsStudent Loans: subsidized loans (government pays interest on during periods of authorized ferment, less expensive); unsubsidized loansBenefits: deferred interest, future deferral of payments possible, Perkins loans can be forgivenThree factors determine your monthly payments:Amount you borrow-down paymentLength of LoanInterest rate on loanInterest calc method (simple interest, add on interest, bank discount)APR: total annual finance charges/average loan balance over the yearInterest: Remaining balance of Loan x Periodic Rate=Remaining Balance of Loan x (Nominal rate/Payments per year)APR for Simple Interest Loan: total interest paid in the first month/amount owedDiscount interest: expensive form of interest calculation, single payment loansAdd-on Interest: some installment loans use thisPayment= Amount of Loan + (Amount of loan x Nominal Rate x # of years)/ Number of PaymentsAPR approx. for add-on interest loans: total annual finance charges/(original loan amount x .5)Interest: loan amount x rate x # of yearsPayment: (loan amount + interest)/ # of paymentsThe Five C’s of CreditCapacity-repay loanCapital-assetsCollateral- pledging securityCharacter- takes debt responsibility seriouslyConditions – economic conditions?Rule of 78’s: a mathematical formula used to calculate the amount of interest remaining to paid on an add-on installment loanBalloon Loan: a loan for which the regular installment payments are calculated using a longer amortization period, but a single large payment is required after a shorter period of time to repay the balance in fullCosigner: a person who agrees to take responsibility for repayment of a loan if the primary borrower defaultsCredit Bureaus: companies that collect credit info on individuals and provide reports to interested lendersWays to Improve Your Credit:Have a steady job/residenceKeep your expenses under control and savePay bills on timeCheck your credit report frequentlyDo not have too many credit cardsDo not request credit from many sourcesReduce outstanding creditIf you are denied credit:Adverse info in your credit reportInsufficient income relative to expensesInsufficient collateralInsufficient job historyInsufficient residency at current addressRights in Obtaining Credit:Full and Accurate InfoFreedom from DiscriminationSpecial Concerns for WomenIF your credit score is too low, raise it by:Correct outdates and incorrect info in your credit reportConsistently make timely paymentsReduce your total debtDevelop a longer credit historyInclude a mix of types of credit, not just credit cardsClose accounts that you haven’t used recentlyYour credit report is likely to include at least one error; 20% of all complaints the Fed Trade Commission receives involve credit bureausMeeting Payment Obligations:Obtain a debt consolidation loan at a lower interest rateTake a second job specifically earmarked to pay down the debtDevelop a zero-based budgetLive with your parents or other family membersSell AssetsReducing Outstanding Debt:Compute PMTBankruptcy: legal right under the US to be relived of certain debts and obligationsAvoid bankruptcy by contacting your creditors directly, consumer credit counseling, use bankruptcy as last resort1.1 million bankruptcies filed in 2009, increased from 850,912 in 2007Chapter 8: Automobile and Housing DecisionsTotal Costs of Automobile Ownership:Finance Charges: fixed cost, opportunity cost from not getting earnings on investment from another financial institutionDepreciation: the decline in value of an asset over time due to wear and tear, obsolescence and competitive factorsIncremental Auto Insurance CostOther fixed Costs: car registration, licenses, taxesVariable expenses: how much you use your vehicle, gas, maintenanceThe Automobile DecisionPriceSticker price: manufacturer suggested retail price for a new vehicle, includes installed accessories and optionsDealer’s Invoice price: price that a dealer pays to purchase a new vehicle from the manufacturerUSE this to figure out how much you can afford: PVA = PMT [(1 - (1 / (1 + i)n)) / i]New vs. UsedEquipmentSize and Fuel EfficiencySafety: 40,000 auto accident fatalities per yearReliability: expenses for maintenance and repairsWarrantiesExpress warranty: written or oral

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UMD FMSC 371 - Chapter 7: Consumer Loans and Credit Managements

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