Review
The process of paying off a debt in regular installments over a period of time is known as
amortization
The smallest amount you can pay each month to keep your credit card in good standing is called the
minimum payment
Amanda has taken out a(n) ___________________________ which has an interest rate that changes based on the market. As a result, her monthly payments may change.
variable-rate loan
is often considered a risky option for emergency cash because it needs to be repaid by your next paycheck and has a high interest rate.
payday loan
To purchase their first home, the Thompsons took out a
mortgage
Jenny’s mother added her as a(n) ___________________________ on her credit card account so Jenny could build a credit history under supervision.
authorized user
A car loan is an example of ___________________________ , where the loan is backed by collateral. If payments are not made, the lender can seize the car itself.
secured debt
When buying a new car, Michael was required to pay 20% of the car’s price upfront as a(n) ___________________________ reducing the amount he needed to borrow
down payment
The ___________________________ is the amount of money you borrow from a lender. The ___________________________ is the amount you are charged to borrow that money. The ___________________________ is how long you have to pay the money back, with interest, to the lender.
principal, interest, term
The maximum amount of money that can be charged to a credit card is known as the
credit limit
Explain what net worth is used for and how it is calculated
Net worth is a way to understand your financial situation. It is calculated by taking all of your assets and subtracting your liabilities.
Net Worth = Grand Total of Assets - Liabilities
For each type of loan below, identify what type of credit it is.
a. Auto Loan ▢ Installment ▢ Revolving
b. Student Loan ▢ Secured ▢ Unsecured
c. Personal Loan ▢ Fixed ▢ Variable
d. Mortgage ▢ Secured ▢ Unsecured
e. Adjustable-Rate Mortgage ▢ Fixed ▢ Variable
f. Credit Card ▢ Installment ▢ Revolving
Why might someone use a credit card to make a purchase, instead of cash or a debit card?
● To cover an emergency expense
● To build their credit history for big, future purchases such as a car or home
● To take advantage of credit card rewards programs
It’s important for young people to start building a credit history and have a credit score. What are some ways people under the age of 21 can do so?
● Get a cosigner (parent, guardian, etc.) so you can open up a credit card account
● Start paying off the interest on student loans while you’re in school to bump up your credit score
● Get a secured credit card
● Become an authorized user on a parent or guardian’s credit card account
Why is it important to review a Schumer Box in detail when evaluating a credit card?
A Schumer Box is a standardized way of presenting the key terms of your credit card agreement, so it’s important to thoroughly review it and make sure you understand all the different components that are included such as APR, fees, and more.
Ryan just opened a credit card account and says to you, “Managing a credit card is so easy! I can buy a ton of stuff, and then just make the minimum monthly payment each month. What a great deal!” What would you say to Ryan to clear up his misconceptions?
You are still responsible for paying off the whole balance.
● Making only the minimum monthly payment means you are still carrying over a part of your balance.
● Because you have not paid back all of the money you have borrowed, you are charged interest on that amount. As a result, you now have to pay the balance and the interest that accrues, costing you more in the long term.
● If you continue to only pay the minimum monthly payment, then the majority of your payment will go towards paying off the accrued interest, not the balance, which can lead to a cycle of debt.
What are 2-3 reasons that explain why people may have different perspectives about taking on debt?
● May have existing debt
● Family is/was able to pay for their college, car, home, etc.
● Prior experiences with debt that went well or poorly
● How much income they have now or expect to have later
● How much of a “safety net” they have - can family, friends, community help them?
If you have a loan with a longer term, you are more likely going to have
(lower / higher) monthly payments and pay
(less / more) in total interest.
Explain how an amortized loan works and why it’s a good idea to pay MORE than the amortized payment on a loan if you are able
With an amortized loan, your monthly payments are the same. Over time however, the amount of your payment that goes towards paying off interest decreases while the amount of your payment that goes towards paying off the principal balance increases.
Identify if the following statements would increase or decrease your monthly auto payment:
a. You have a large down payment ▢ Increase ▢ Decrease b. The term on your auto loan is long ▢ Increase ▢ Decrease c. You have a low credit score ▢ Increase ▢ Decrease d. Your loan has a high APR ▢ Increase ▢ Decrease
Explain how payday loans can cause a cycle of debt for consumers who use them.
● Payday loans have extremely high interest rates, close to 400% ● The amount borrowed is often due within two weeks, which consumers may find difficult to do.
● As a result, consumers often are not able to pay off the amount they borrowed, accrue interest at high rates, and may have to pay additional fees.
Why are payday loans easier to get than traditional bank loans?
Payday loans do not require a credit check; they only require proof of employment or other regular income.
Maria wants to buy a car but is wary of getting an auto loan because she’s heard that it is “bad debt.” What does she mean by this? Do you agree that auto loans are “bad debt”? Explain.
● Bad debt typically has a higher interest rate, isn't backed by a value increasing asset, and can be unplanned. An auto loan is seen as “bad debt” because cars lose value. Good debt typically has a lower interest rate, is seen as an investment (like a house or education) and is within budget.
● [Answers may vary] An auto loan may be “good” or “bad” debt depending on the person and their situation. If someone needs a car to get to work everyday, then taking an auto loan might be considered “good” so that they can earn their living. If, however, someone takes on an auto loan but cannot afford to make the monthly payments, then that could be “bad debt”.
In your own words, explain what Buy Now Pay Later is. Identify one advantage and one disadvantage of using this service.
Buy Now Pay Later is an alternative payment method that allows you to make a purchase immediately, then make payments in future installments. ● Advantages: Can buy something that you really need that maybe does not fit into your budget and pay it off over time
● Disadvantages: Can accrue interest or incur late fees if you do not make the payments on time. If you wait a really long time to make your payments, your loan may be sent to a collection agency.
What is the difference between a fixed-rate mortgage and an adjustable rate mortgage?
FIXED-RATE MORTGAGES
ADJUSTABLE-RATE MORTGAGES
● Interest rate on the mortgage is fixed; it will not change
● Less risky, because your
monthly payment is
predictable
● Interest rate on the mortgage changes along with the
broader economy and
markets
● More risky, because your
monthly payment could go up and possibly beyond what
you’ve budgeted for