Borrowing Money – Flashcards
Unlock all answers in this set
Unlock answersquestion
Credit
answer
The ability to borrow money.
question
Principal
answer
A prime sum of money borrowed, excluding interest.
question
interest rate
answer
A percentage of the money borrowed, added to the principal sum when paying back.
question
finance charge
answer
A fee for using credit.
question
installments
answer
The cost of something divided into equal payments over a specified period of time.
question
annual percentage rate (APR)
answer
Interest rate on the balance of a loan, paid in installments.
question
credit limit
answer
The highest amount a creditor is willing to lend a specific person.
question
Explain what is meant by credit. What is the function of interest?
answer
Responses will vary. A sample response follows: Credit is the ability to borrow money. For the borrower, it is the ability to get a product or service based on the promise to pay for it in the future. Interest is the fee paid for using someone else's money and its function is to make lending money worthwhile for the lender.
question
The ability to borrow money defines the term __________.
answer
Credit
question
A loan that is backed by collateral is __________.
answer
secured
question
When repaying a loan with interest calculated at an annual percentage rate, the dollar amount paid in interest __________ each month.
answer
decreases
question
Compare the advantages and disadvantages of using cash instead of a credit card to obtain goods and services.
answer
Responses will vary. A sample response follows: The advantages of using cash instead of credit cards include no annual fees, no way to acquire debt, more incentive to budget money, and spending less because it is more painful to part with cash. The disadvantages of using cash include purchases may have to be delayed due to a lack of available cash and no protection resulting from the loss of stolen cash or goods.
question
Explain how credit card companies make money on their cards. What is a credit card issuer?
answer
Responses will vary. A sample response follows: Credit card companies make money on their cards by charging banks a fee to issue their cards. They also charge merchants to accept their credit cards when customers use them to pay for products and services. Credit card issuers are financial institutions that establish credit accounts for their customers and provide them with a pre-approved credit limit.
question
Describe the factors that determine the amount you ultimately pay for borrowing money. How is it possible to reduce the amount you end up paying?
answer
Responses will vary. A sample response follows: The factors that determine the amount paid for borrowing money are the amount of the loan, the length of the loan, and the annual percentage rate of the loan. The larger the amount borrowed and the longer that it takes to pay the money back determine how much interest will be paid on the loan. It is possible to reduce the amount you end up paying by shopping for the lowest annual percentage rate and paying off the loan as quickly as possible.
question
Explain how a credit card works when a customer makes a purchase.
answer
Responses will vary. A sample response follows: When a customer buys something with a credit card, the bank pays the store on the customer's behalf. The customer will then receive a bill and usually has between 20 to 30 days to pay the balance. If the balance is not paid in full, then a finance charge will be added to the remaining balance. Finance charges are added each month until the balance is completely paid off.
question
Most loans are paid back in __________ installments.
answer
monthly
question
Explain the difference between an interest rate and finance charge.
answer
An interest rate is a percentage of the amount of money borrowed. A finance charge is the interest paid stated as a dollar amount.
question
When a customer buys something with a credit card, the ____ pays the store on the customer's behalf.
answer
Bank
question
The annual percentage rate is the interest on a loan paid in ____.
answer
Installements
question
The interest rate is based on a percentage of the amount of __________.
answer
money borrowed
question
Visa and MasterCard are examples of credit card __________.
answer
Brands
question
A fee paid for using someone else's money is called __________.
answer
interest
question
The function of interest is to make lending money worthwhile and profitable for the __________.
answer
Lender
question
interest
answer
The difference between the amount paid over the lifetime of a loan, that is compounded n times in a given year, and the principal amount borrowed is defined as the interest.
question
service charge
answer
A service charge is the sum of lender fees for taking out a loan.
question
finance charge
answer
A finance charge is the total cost of taking out a loan, which includes the interest paid over the lifetime of the loan and any service fees applied by the lender.
question
Carlos took seven years to pay off his loan by making identical quarterly payments. The loan had a principal of $22,375 and 5.49% interest, compounded quarterly. Carlos paid a total of $28,821.67. How much did Carlos pay in service charges? Round all dollar values to the nearest cent.
answer
$1,721.31
question
You have just finished paying off your $35,125 loan, a feat which took ten years of quarterly payments. The loan had an interest rate of 7.44%, compounded quarterly. If you also paid $5,180.70 in service charges, what percentage of the total cost was made up by your finance charges? Round all dollar values to the nearest cent.
answer
36.47%
question
Niki makes the same payment every two months to pay off his $61,600 loan. The loan has an interest rate of 9.84%, compounded every two months. If Niki pays off his loan after exactly eleven years, how much interest will he have paid in total? Round all dollar values to the nearest cent.
answer
$39,695.48
question
Jerry's loan had a principal of $22,000. He made quarterly payments of $640 for nine years until the loan was paid in full. How much did Jerry pay in interest?
answer
$1,040
question
Maria is going to take out a loan with a principal of $19,700. She has narrowed down her options to two banks. Bank M charges an interest rate of 7.1%, compounded monthly, and requires that the loan be paid off in five years. Bank N charges an interest rate of 7.8%, compounded monthly, and requires that the loan be paid off in four years. How would you recommend that Maria choose her loan?
answer
Maria should choose Bank M's loan if she cares more about lower monthly payments, and she should choose Bank N's loan if she cares more about the lowest lifetime cost.
question
Kevin has just finished paying off his loan. He was assessed a service charge of $422. He paid off the principal and the interest by making weekly payments of $36.13 for four years. If the principal was $7,150, how much did Kevin pay in finance charges, to the nearest dollar?
answer
$787
question
Paul has an eight-year loan with a principal of $26,900. The loan has an interest rate of 8.18%, compounded quarterly. If Paul pays $1,527 in service charges and makes quarterly payments on his loan, what will his total finance charge be when the loan is repaid? Round all dollar values to the nearest cent.
answer
$11,546.36
question
Brian took eight years to pay off his $71,900 loan. The loan had an interest rate of 8.16%, compounded quarterly. If Brian paid quarterly and made the same payment every time, how much was each payment that he made?
answer
$3,081.54
question
Kay has decided to take out a $23,100 loan, and she wants to pay it back in quarterly installments. She has narrowed her options down to two banks. Bank V offers a six-year loan with an interest rate of 4.6%, compounded quarterly, and has a service charge of $822.45. Bank W offers an eight-year loan with an interest rate of 3.9%, compounded quarterly, and a service charge of $722.25. Which loan will have the greater total finance charge, and how much greater will it be? Round all dollar values to the nearest cent.
answer
Loan W's finance charge will be $335.96 greater than Loan V's.
question
The principal on Jan's loan was $4,700, but by the time she had paid it off after four years, the interest and principal totaled $5,388. If Jan made regular quarterly payments of $355 until the loan was paid off, how much did Jan pay for service charges?
answer
$292
question
Yvette is considering taking out a loan with a principal of $16,200 from one of two banks. Bank F charges an interest rate of 5.7%, compounded monthly, and requires that the loan be paid off in eight years. Bank G charges an interest rate of 6.2%, compounded monthly, and requires that the loan be paid off in seven years. How would you recommend that Yvette choose her loan?
answer
Yvette should choose Bank F's loan if she cares more about lower monthly payments, and she should choose Bank G's loan if she cares more about the lowest lifetime cost.
question
Which of these best fits the definition of interest, as it applies to finance?
answer
Interest is the cost of borrowing money.
question
Travis took out a six-year loan with a principal of $15,000. He made monthly payments of $225 for the entire period, at which point the loan was paid off. How much did Travis pay in interest?
answer
$1200
question
What is the difference between a service charge and a finance charge?
answer
A service charge is a fee assessed by a lender other than interest, and a finance charge is the total of the interest paid on a loan and the service charge.
question
Dahlia is trying to decide which bank she should use for a loan she wants to take out. In either case, the principal of the loan will be $19,450, and Dahlia will make monthly payments. Bank P offers a nine-year loan with an interest rate of 5.8%, compounded monthly, and assesses a service charge of $925.00. Bank Q offers a ten-year loan with an interest rate of 5.5%, compounded monthly, and assesses a service charge of $690.85. Which loan will have the greater total finance charge, and how much greater will it be? Round all dollar values to the nearest cent.
answer
Loan Q's finance charge will be $83.73 greater than Loan P's.
question
Dana just finished paying off the $15,400 loan she took out four years ago. The loan had 6.68% interest, compounded monthly. If Dana paid a total of $18,321.60, how much did she pay in service charges?
answer
$730.08
question
How does Truth-in-lending benefit consumers when shopping for a loan?
answer
Truth-in-lending allows consumers to know every cost that is associated with the loans they research and apply for, and helps them reach the optimal decision.
question
Say you take out a loan with a principal of $44,500. The interest rate is 13.11%, compounded monthly. If you make consistent monthly payments and pay off the loan over the course of six and a half years, how much interest will you have paid in total? Round dollar amounts to the nearest cent.
answer
$21,849.92
question
Why is the interest rate of a loan one of the most important things to consider when shopping around for loans?
answer
The interest rate can drastically change the total amount paid to the lender, in the case of mortgages, up to thousands of dollars.
question
Service Credit
answer
Service credit is consumer credit that allows for the use of utilities.
question
Installment Credit
answer
Installment credit is issued by a store and is used when financing smaller purchases such as appliances, furniture, and electronics.
question
Credit Card
answer
Credit cards are the most common form of credit in which borrowers use credit cards to charge purchases.
question
Open line of credit
answer
An open line of credit allows for repeated transactions by the borrower while the borrower pays a calculated amount each month until the borrowed amount is repaid.
question
Closed line of Credit
answer
A closed line of credit refers to an installment or personal loan where a fixed total amount is loaned with repayment at a fixed monthly amount over time.
question
Secured loan
answer
Secured loans are loans that require collateral which can be used to pay off the loan in the event of non-payment.
question
unsecured loan
answer
Unsecured loans, which do not require collateral, are based on the borrower's credit score and the borrower's ability to repay the loan.
question
APR
answer
APR, or annual percentage rate, is the cost of credit expressed as a percentage rate and can be either fixed or variable.
question
Penalty charges
answer
Penalty charges are incurred when a consumer makes a late payment.
question
Balance transfer
answer
A balance transfer is when a consumer will transfer outstanding credit debt from one account to another.
question
Darlene has an offer to move her debt from a card with 13% APR to a card with 7% APR. There is a $25 balance transfer charge for this offer. Darlene has $400 in debt on her card. Should she transfer her balance to the 7% APR card?
answer
(400)(0.13)= $52/year
(400)(0.07)= $28/year
$24
question
Connie has two credit cards, U and V. Card U has a balance of $414.55, and Card V has a balance of $751.81. The minimum monthly payment on Card U is 2.82% of the balance, and the minimum monthly payment on Card V is 3.09% of the total balance. How much greater is the minimum payment on Card V than on Card U?
answer
Card U: (414.55)(0.0282)=$11.69
Card V: (751.81)(0.0309)=$23.23
23.23-11.69= $11.54
question
What is an unsecured line of credit?
answer
A line of credit which does not require collateral.
question
What is a closed line of credit?
answer
A line of credit with a fixed total amount.
question
Sandra has two credit cards, P and Q. Card P has a balance of $726.19 and an interest rate of 10.19%, compounded semiannually. Card Q has a balance of $855.20 and an interest rate of 8.63%, compounded monthly. Assuming that Sandra makes no purchases and no payments with either card, after four years, which card's balance will have increased by more, and how much greater will that increase be?
answer
Card P: 726.19(1+ 0.1019/2)^8
=1080.70-726.19= 354.51
Card Q: 855.20(1+0.0863/12)^48
=1206.28-855.20= 351.08
354.51-351.08= $3.43
question
The legally mandated disclosure of terms and conditions found on every credit card is called the "Schuyler Box."
answer
False
question
Gary has a credit card with an APR of 13.57%, compounded monthly. He would like to pay off the $1,847.42 card balance over the course of two and a half years by making identical monthly payments. Assuming that he makes no additional purchases on his card, how much must Gary pay every month to reach his goal? (Round all dollar values to the nearest cent.)
answer
1847.42 [(0.1357/12)/1-(1+0.1357/12)^-30]
P= $72.96
question
Rodney owes $1,541.05 on his credit card. His card has an APR of 16.29%, compounded monthly. Assuming that he makes no payments and no purchases, how much will he owe after one year?
answer
1541.05(1+0.1629/12)^12
=$1811.70
question
Which of the following types of credits would best describes home equity loans?
answer
closed and secured
question
May currently has a balance of $1,817.43 on her credit card. If she must make a minimum monthly payment of 3.44% of her total balance, what is her minimum payment, to the nearest cent?
answer
$62.52
question
If Jordan makes only the minimum monthly payments in March, April, and May, what will his balance be after he makes the minimum payment for May? (Assume that interest is compounded before the monthly payment is made, and that the monthly payment is applied at the end of the month. Round all dollar values to the nearest cent.)
answer
$988.97
question
What is a secure line of credit?
answer
A line of credit backed by collateral.
question
Darryl's credit card has a minimum monthly payment of 2.51% of the card's balance. If Darryl currently owes $1,431.72, what is his minimum payment, to the nearest cent?
answer
$35.94
question
Victor has a credit card with an APR of 13.66%, compounded monthly. He currently owes a balance of $1,349.34. Assuming that Victor makes no purchases or payments, how much will he owe after one year, to the nearest cent?
answer
$1,545.65
question
You are looking for your first credit card. You plan to use this credit card only for emergencies and to pay the credit card balance in full each month. Which credit card feature is most important?
answer
No annual fee
question
What is the prime rate?
answer
The prime rate is the best interest rate that banks offer their most creditworthy customers.
question
What is the name of the legally mandated area on every credit solicitation which provides information about the terms and conditions of the card?
answer
Schumer Box
question
Currently you have two credit cards, H and I. Card H has a balance of $1,186.44 and an interest rate of 14.74%, compounded annually. Card I has a balance of $1,522.16 and an interest rate of 12.05%, compounded monthly. Assuming that you make no purchases and no payments with either card, after three years, which card's balance will have increased by more, and how much greater will that increase be?
answer
Card I's balance increased by $53.16 more than Card H's balance.
question
APR
answer
APR, or annual percentage rate, is the cost of credit expressed as a percentage rate and can be either fixed or variable.
question
Impulse buying
answer
Impulse buying is the act of making an unplanned or otherwise spontaneous purchase.
question
Consumer Protection
answer
Consumer protection is a law or measure that protects the consumer from fraudulent or deceptive sales practices.
question
Credit Card
answer
Credit cards are the most common form of credit in which borrowers use credit cards to charge purchases.
question
Cash Advance
answer
A cash advance is a service provided by most credit card and charge card issuers which allows cardholders to withdraw cash up to a certain limit.
question
Alissa needs to determine the amount needed in her account that pays an APR of 3.2% so that she can draw an annual salary of $10262.32 for 10 years.
answer
10262.32(1-(1+0.032)^-10/0.032)
= $86652.91
question
Bob's car needs a new transmission, a repair that will cost $1,763.00. Bob does not have enough money in his savings account to cover the cost of the repair. To make matters worse, Bob's mechanic, who works out of his home, is unable to accept credit cards. Bob is hesitant to take out a cash advance on his credit card knowing that it will take him 12 months to pay of the balance and that a cash advance comes with a 30% interest rate. If Bob uses a cash advance to pay for the repairs, how much extra will he have to pay in interest?
answer
=1763[(.3/12)/1-(1+.3/12)^-12
=$171.87
171.87X12=2062.44-1763=$299.44
question
Jason is looking for an engagement ring to offer his girlfriend. He has found a similar ring at each of four different jewelry stores. He doesn't have enough money to pay for the ring in cash, so he is planning on opening a line of credit (credit card) at the store he ends up buying the ring from. The chart below outlines the difference in the price of the rings the different stores offer as well as the difference in credit options. Jason plans to pay off the ring purchase in 36 months. According to the information in the table, which of the jewelry stores will have the cheapest ring in the end?
answer
Diamonds Forever
question
Describe the effect an increase in n, the number of payment periods, has on the monthly payment P in the formula
P=PV(i/1-(1+i)^-n
answer
An increase in n, the number of payment periods, will create a decrease in P, the monthly payment.
question
Robby is considering taking out a cash advance on his credit card to purchase a new television. His credit card offers cash advances up to $500.00 at an interest rate of 28%. If the television costs $350.00 and Robby plans to pay the balance of in 6 months, how much extra will he pay in interest to purchase the television?
answer
=350[(.28/12)/1-(1+.28/12)^-6]
P=$63.19
63.19X6=279.14-350=$29.14
question
Ralph is purchasing a new gaming system for $300.00. He is trying to decide whether he wants to use cash or his credit card to pay. He has $600.00 available in his checking account to pay for the system in full.
Which of the following is not an argument that justifies Ralph's use of his credit card to purchase the gaming system?
answer
With credit, he is not required to pay off his balance for a very long time. That's $300 more in his pocket.
question
Sally needs to have some drywall and insulation work done in her house. She has received a quote from a professional drywall contractor to complete her repairs for $1,200. Her neighbor Steve says he can complete the same job for $800. Sally could use a credit card to pay the contractor, but Steve can only accept cash. Sally's credit card has a 14% APR for credit purchases and a 32% interest rate for cash advances. Expecting to pay $50 of the principle plus appropriate interest each month, Sally estimates that it would take her 24 months to pay off the contractor balance and 16 months to pay off the cash advance balance.
In the end, would it be cheaper for Sally to hire the contractor or her neighbor to complete the repairs?
answer
Contractor: For $1,200 at 14% for 24 months, Sally would be have to pay $57.62 per month, or $1,382.88 after 24 months. Neighbor Steve: For $800 at 32% for 16 months, Sally would have to pay $62.08 per month or $993.28 after 16 months. Even with the (much) higher interest rate, Sally would pay $389.60 less if she went with Neighbor Steve. Even better is that the monthly payments would be about the same for the given timelines. Sally would still want to weight the benefits of contracted work vs. non-contracted work.
question
The higher interest rate of a cash advance on a credit card with an existing balance can be eliminated by paying the cash advance back within four weeks.
answer
False
question
Tim would like to use his income tax return to pay off one of his four credit cards. His previous plan was to pay off all four credit cards in the same timeline of 36 months. He wants to eliminate the card that is charging him the most interest on a monthly basis. The chart below outlines Tim's four credit cards, their balances, and their APRs. Which credit card should Tim use his tax return to pay off?
answer
1260[(.12/12)/1-(1+.12/12)^-36]
=$41.85
41.85X36=1506.60 $246.60
32.54X36=1171.44 $271.44
41.02X36=1476.72 $186.72
42.19X36=1518.84 $318.84
Card D
question
As a New Year's resolution, Jimmy has agreed to pay off his 4 credit cards and completely eliminate his credit card debt within the next 12 months. Listed below are the balances and annual percentage rates for Jimmy's credit cards. In order to pay his credit card debt off in the next 12 months, what will Jimmy's total minimum credit card payment be?
answer
$411.25
question
Credit cards can only lead to debt that is difficult to eliminate and should be avoided at all costs.
answer
False
question
Describe the effect an increase in i, the interest rate applied to the present value, has on the monthly payment P in the formula
P=PV(i/1-(1+i)^-n
answer
An increase in i, the interest rate, will create an increase in P, the monthly payment.
question
Ralph is purchasing a new gaming system for $300.00. He is trying to decide whether he wants to use cash or his credit card to pay. He has $600.00 available in his checking account.
Which of the following is not an argument that justifies Ralph's use of his cash to purchase the gaming system?
answer
Using cash can help Ralph improve his credit score.
question
Tom has offered to sell Julian his motorcycle for $1,200. Julian know this is a very good deal, since the same motorcycle can be purchased at the dealership for $1,800. Since Julian doesn't have $1,200 and Tom does not accept credit cards, they both think a cash advance might be a good idea. Julian's credit card company can offer him a cash advance for the $1,200 he needs at an interest rate of 26%. He would then pay off the balance in 24 months. Should Julian use the cash advance to purchase the motorcycle?
answer
Yes. Even with the interest, the total cost of the motorcycle would be less than at the dealership.
question
Sam is getting ready for a big date when he realizes that he has no money. His roommate, Bill, also has no money, but he has a credit card. Knowing that nobody will let Sam use Bill's credit card, Sam asks Bill to pull out a cash advance for $120.00. Bill agrees under the condition that Sam is responsible for all interest that accrues on the cash advance which is a 30% interest rate, compounded monthly. 5 full years go by before the $120 cash advance is repaid. How much should Bill ask Sam to pay in interest for the cash advance?
answer
$112.80
question
Listed below are the balances and annual percentage rates for Jimmy's credit cards. If Jimmy makes the same payment each month to pay off his entire credit card debt in the next 12 months, how much will he have paid in interest in the 12 month period?(Hint, find out how much interest Jimmy pays to each card over the 12 months seperately, and then add them together.)
answer
$449.24
question
Which of the following is not a benefit to using credit instead of cash?
answer
Using credit allows you to make impulsive buys.
question
Tim has four credit cards with the balances and APRs listed in the chart below. What will Tim's total monthly minimum credit card payment need to be to pay off all four credit cards in 24 months?
answer
$221.93
question
Credit report
answer
A credit report is a detailed report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan, including information about late payments and bankruptcy.
question
Credit score
answer
Credit score is a measure of credit risk calculated from a credit report using a standardized formula.
question
Credit rating
answer
A credit rating is an estimate, based on previous dealings, of a person's ability to fulfill their financial commitments.
question
Credit history
answer
A credit history is a record of an individual's past borrowing and repaying.
question
FICO score
answer
FICO score is a score given by the scoring system used by the three credit reporting agencies and represents the creditworthiness of a person.
question
Debt
answer
A debt is an amount owed to a person or organization for funds borrowed.
question
If a credit card balance is not paid in full within the grace period then the customer will receive a __________.
answer
finance charge
question
A loan in which the borrower pledges a car that may be sold if the loan is not repaid is __________.
answer
secured
