Quiz 2 04 29 2014 Chapter 7 Consumer Loans and Credit Managements Fixed 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 future Principal original amount borrowed or invested Installment loan requires repayment in equal periodic installments which include interest and principal Default failure to meet the terms of a loan agreement as when payments are not made in a timely fashion Acceleration clause loan term that requires immediate repayment of the total amount due on an installment loan that is in default Prepayment penalty a fee charged to the borrower when a loan balance is repaid before the end of the loan term Secured 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 default Deficiency 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 property Home 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 institutions Sales Finance Company a nondepository institution that makes consumer loans to buyers of products offered through its parent company Promissory Note legal contract that specifies the terms and conditions of the borrower s agreement to repay a sum of money Down Payment amount of the purchase price that buyer pays in cash Loan Term Closed end credit requires repayment over a specified period of time Secured Loan include a description of the collateral car loans Unsecured Loan credit cards Student Loans subsidized loans government pays interest on during periods of authorized ferment less expensive unsubsidized loans Benefits deferred interest future deferral of payments possible Perkins loans can be forgiven Three factors determine your monthly payments Amount you borrow down payment Length of Loan Interest rate on loan Interest calc method simple interest add on interest bank discount APR total annual finance charges average loan balance over the year Interest 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 Discount interest expensive form of interest calculation single month amount owed payment loans Add on Interest some installment loans use this Payment Amount of Loan Amount of loan x Nominal Rate x of years Number of Payments APR approx for add on interest loans total annual finance charges original loan amount x 5 Interest loan amount x rate x of years Payment loan amount interest of payments The Five C s of Credit Capacity repay loan Capital assets Collateral pledging security Character takes debt responsibility seriously Conditions economic conditions Rule of 78 s a mathematical formula used to calculate the amount of interest remaining to paid on an add on installment loan Balloon 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 full Cosigner a person who agrees to take responsibility for repayment of a loan if the primary borrower defaults Credit Bureaus companies that collect credit info on individuals and provide reports to interested lenders Ways to Improve Your Credit Have a steady job residence Keep your expenses under control and save Pay bills on time Check your credit report frequently Do not have too many credit cards Do not request credit from many sources Reduce outstanding credit If you are denied credit Adverse info in your credit report Insufficient income relative to expenses Insufficient collateral Insufficient job history Insufficient residency at current address Rights in Obtaining Credit Full and Accurate Info Freedom from Discrimination Special Concerns for Women IF your credit score is too low raise it by Correct outdates and incorrect info in your credit report Consistently make timely payments Reduce your total debt Develop a longer credit history Close accounts that you haven t used recently Include a mix of types of credit not just credit cards Your credit report is likely to include at least one error 20 of all complaints the Fed Trade Commission receives involve credit bureaus Meeting Payment Obligations Obtain a debt consolidation loan at a lower interest rate Take a second job specifically earmarked to pay down the debt Develop a zero based budget Live with your parents or other family members Sell Assets Reducing Outstanding Debt Compute PMT Bankruptcy legal right under the US to be relived of certain debts and obligations 2007 Avoid bankruptcy by contacting your creditors directly consumer credit counseling use bankruptcy as last resort 1 1 million bankruptcies filed in 2009 increased from 850 912 in Chapter 8 Automobile and Housing Decisions Total Costs of Automobile Ownership Finance Charges fixed cost opportunity cost from not getting earnings on investment from another financial institution Depreciation the decline in value of an asset over time due to wear and tear obsolescence and competitive factors Incremental Auto Insurance Cost Other fixed Costs car registration licenses taxes Variable expenses how much you use your vehicle gas maintenance The Automobile Decision Price o Sticker price manufacturer suggested retail price for a new vehicle includes installed accessories and options o Dealer s Invoice price price that a dealer pays to purchase a new vehicle from the manufacturer o USE this to figure out how much you can afford PVA PMT 1 1 1 i n i New vs Used Equipment Size and Fuel Efficiency Safety 40 000 auto accident fatalities per year Reliability expenses for maintenance and repairs Warranties o Express warranty written or oral promise by seller o Implied