Basic Features of Consumer Loans
What type of loan is used to straighten out unhealthy credit situations? Such as when a person becomes consumed with overused credit cards, credit lines, or consumer loans and can no longer timely pay off their debts.
Consolidation Loan
Found by adding the amount put down on the purchase to the total of all the monthly loan payments
Total Cost of Transaction
This type of loan is repaid in full with a single payment on an agreed-upon due date.
Single-Payment Loan
When interest is charged only on the outstanding balance of the loan.
Simple Interest
Jim Grant plans to borrow $12,000 for five years. The loan will be repaid with a single payment after 5 years, and the interest on the loan will be computed using the simple interest method at an annual rate of 12%.
How much will Jim have to pay in five years?
On a single payment loan, the finance charge using the simple interest method or Fs = Principal x Rate x Time. So Jim will owe the original principal plus interest at the end of the time period or $12,000 + ($12,000 x 0.12 x 5) = $12,000 + $7,200 = $19,200.
A loan made for a specified period, at the end of which payment is due in full.
Single-payment Loan
This may result in lower finance charges-possibly up to half a percentage point or so.
Collateral
This gives the lending institution information about the purpose of the loan, whether it will be secured or unsecured, and the applicant’s financial condition.
Loan Application
When simple interest is used with installment loans, interest is charged only on what balance of the loans?
Outstanding Balance of Loan
Find the finance charges on a 5.9 percent, 18-month, single-payment loan when interest is computed using the simple interest method. Assume that the loan amount requested is $1,000. Round your answer to the nearest cent.
First, use the simple-interest method:
Finance charge=Principal × 5.9% × 1.5 years =$1,000 × 0.059 × 1.5 =$88.5
Amount requested – interest=loan proceeds received$1,000 – $88.5=$911.5
These make secured and unsecured (signature) loans to qualified individuals.
Consumer Finance Companies
When someone is presented with too many financial choices and gets overwhelmed, so they fall back on what they already know or to just make the simplest choice by default.
Paradox of Choice
Single Payment Loans have a maturity period of?
One year or less
A type of life (or disability insurance in which the coverage decreases at the same rate as the loan balance
Credit Life Insurance
Assume that you've been shopping for a new car and intend to finance part of it through an installment loan. The car you're looking for has a sticker price of $16,000. The local dealership has offered to sell it to you for $3,000 down and finance the balance with a loan that will require 48 monthly payments of $323.51; Adventure Vehicles will sell you the exact same vehicle for $3,500 down plus a 60-month loan for the balance, with monthly payments of $253.45. Which of these two finance packages is the better deal?
Local Dealership
What are items of value used to secure the principal portion of a loan?
Collateral
What does APR stand for?
Annual Percentage Rate
This act requires lenders to disclose in the loan agreement whether, and in what amount, prepayment penalties are charged on a single-payment loan
Truth in Lending Act
A method of calculating interest by computing finance charges on the original loan balance and then adding interest to that balance
Add-on method
Sara Boquist needs to borrow $2,500. First State Bank will lend her the money for 12 months through a single-payment loan at 12 percent, discount; Home Savings and Loan will make her a $2,500, single-payment, 12-month loan at 14.5 percent, simple interest. From where should Sara borrow the money?
First State Bank will lend Sara the $2,500 for 12 months through a single-payment loan at 12% discount. The APR on this loan is calculated as follows:
APR = ($2,500 x 0.12 x 1 ) / ($2,500 – $300) = $300/$2,200 = 13.64%
Home Savings and Loan will make the $2,500 single-payment, 12-month loan at 14.5% simple interest. The APR on this loan is:
APR = ($2,500 x 0.145 x 1 ) / ($2,500) = $362.5/$2,500 = 14.50%
Sara should borrow the money from First State Bank because they will charge her an annual percentage rate (APR) of 13.64%, while Home Savings and Loan will charge her an APR of $14.50%.
What are the three types of federally sponsored student loans?
Stafford, Perkins, and Parent loans
What are the two questions to ask yourself when considering the use of a consumer loan?
making this purchase fit into your financial plans / do the required debt payments fit into your monthly cash budget
What is a loan rollover and why would someone have to take one out?
It is when you pay another loan off with a new loan. You do this when you cannot afford to pay off the original.
A procedure that is used to find the monthly finance charges on add-on loans.
The Rules of 78s
Sherman Jacobs plans to borrow $5,000 and to repay it in 36 monthly installments. This loan is being made at an annual add-on interest rate of 11.5 percent.