Fin 1050-Reading Guide Chapter 7 Using Consumer Loans: The Role of Planned Borrowing. 4. Explain loan amortization:

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1 Name: Fin 1050-Reading Guide Chapter 7 Using Consumer Loans: The Role of Planned Borrowing DIRECTIONS: As you read through Chapter 7 in your textbook, answer the following questions: 1. What is the definition of a single-payment or balloon loan? 2. What is the definition of a bridge or interim loan? 3. What is the definition of an installment loan? 4. Explain loan amortization: 5. A secured loan is a loan that is: 6. An unsecured loan is a loan that is: 7. A fixed interest rate loan is a loan with: 8. A variable or adjustable interest rate loan is a loan in which: 9. What is the prime rate? 10. What is a convertible loan? _ SHORTER VERSUS LONGER TERM LOANS: 11. With a shorter term loan monthly payments are. However, the total interest payments are. 12. Why does a shorter term loan often result in a lower interest rate? UNDERSTAND THE TERMS OF THE LOAN: THE LOAN CONTRACT 13. Explain what a security agreement is: 14. What does it mean if a borrower defaults? _ 1

2 15. What is a note? 16. Why would a lender require an insurance agreement clause? 17. What is an acceleration clause? 18. Explain what a deficiency payment clause is: 19. What is a recourse clause? SPECIAL TYPES OF CONSUMER LOANS 20. What is a home equity loan or second mortgage? 21. Define home equity: 22. Explain the two cost advantages of a home equity loan: What is the primary disadvantage of a home equity loan? 24. Define a student loan: 25. What is the average cumulative debt for a college student? 26. Which is greater: national credit card debt or national student loan debt? _ 27. The two most popular student loans are the and the. 28. Stafford loans are for and Direct PLUS loans are for. 29. What is an automobile loan? COST AND EARLY PAYMENT OF CONSUMER LOANS: 30. Define Annual Percentage Rate (APR): 2

3 31. Explain what a loan disclosure statement is: 32. What is the formula for simple interest? 33. For single payment loans, both the and the are due at maturity. 34. When is interest taken out in a loan using the discount method? 35. How much do people typically borrow for a payday loan? 36. What is the annual interest rate for payday loans? _ 37. Look at table 7.2 on page 213 and answer these questions: 1. What percentage of payday loans go to repeat borrowers? 2. The average payday borrower is flipped times by a single lender. 3. African American neighborhoods have times as many payday loan shops as white neighborhoods in North Carolina. 4. The average payday borrower pays $ to borrow $. 5. Payday lending costs American families billion annually. 38. The most common method of calculating payments on an installment loan is the method. 39. Look at Table 7.3 on page 214. If you borrowed $1,000 for 18 months at 14.5% interest, what would your monthly payment be? 40. Look at table 7.4 on page 215. This is an AMORTIZATION TABLE which breaks down each monthly payment on a loan into starting balance, total monthly payment, how much of the payment goes to pay interest, how much goes to pay principal, and the ending balance. Does the amount of interest paid each month go up or down over time? 41. Does the amount of principal payment go up or down over time? GETTING THE BEST RATE ON YOUR CONSUMER LOANS (PAGE 218) 42. In general, what is the least expensive source of funds? 3

4 43. Look at Table 7.7 on page 218. Choose two of the types of lenders from the list and fill out the following table: Lender: Types of Loans Offered: Advantages: Disadvantages: 44. Look at the section on More Expensive Sources on page 219. What source of loans generally offers the most favorable terms? 45. In general, financing from retail stores is quite _. 46. How do you get the most favorable interest rate on a loan? 47. Other than improving your credit rates, there are four ways to reduce the lender s risk and get a better rate for the consumer. They are: Read over the section on Should You Borrow or Pay Cash? on page 220. Summarize the financial literacy lesson this section teaches: CONTROLLING YOUR USE OF DEBT 49. The first step in controlling debt is to 50. What is the formula for the debt limit ratio? 51. An individual s total debt can be divided into debt and debt. Mortgage payments aren t including in the debt limit ratio. 52. You debt limit ratio should ideally stay below %. If it goes over %, most financial planners would advise you to limit the use of additional consumer debt. 4

5 53. Explain what the 28/36 rule is in evaluating mortgage applications: 54. Look at Checklist 7.1 on page 222. Write down eight of the debt danger signs listed here: WHAT TO DO IF YOU CAN T PAY YOUR BILLS 55. The first place to go if you can t pay a bill is: 56. What is a credit or debt counselor? 57. What is a debt consolidation loan? 58. What is bankruptcy? 59. List two of the major causes of bankruptcy: 60. What is the main difference between a Chapter 13 and a Chapter 7 bankruptcy? 61. In a Chapter 13 bankruptcy, you design a that will allow you to repay the of your debts. 62. In a Chapter 7 bankruptcy, most of your debts are wiped out, but you may need to a good portion of your assets to pay your creditors. 63. Some debts are not eliminated, such as support,, student, and. 5