Week 6 - Personal Loans HW and Quiz

Sources of personal loans​ include:

commercial​ banks, savings​ institutions, finance​ companies, and credit unions

Loan agreements with family and friends should:

Be in writing and signed by all parties

List some concerns about online lending

• Some scam artists may ask for an upfront fee until your loan is processed and you are approved

• Avoid a lender offering a guaranteed loan before reviewing your application

Debt consolidation loans are

Used to combine several debts into one larger debt

When is it advisable to use a debt consolidation loan

Debt consolidation can simplify your financial situation and record keeping because you only have to pay one bill each month instead of several. Sometimes you can save money because the interest rate may be lower than the rates you were paying before on the various debts

When a loan is amortized it means that the principal is

Repaid through a series of equal loan payments

As more principal is repaid, the amount of interest is

Reduced, and a larger portion of the payment is used to repay the principal

Collateral includes

Assets used to back a loan in the event that the borrower defaults

Loans backed by collateral are called

Secured loans

Interest rates are usually

Lower on secured loans because the lender has less to lose in the event the loan is not repaid

The longer the maturity of the loan

The lower the monthly payments

You should select the shortest maturity possible while

Still maintaining liquidity

How does a prepayment penalty impact your decision to pay a loan off early?

May charge a penalty if you opt to pay the loan off early. This fee may increase the amount needed to repay the loan, and you may be better off to continue your current repayment schedule

The annual percentage rate (APR) measurement calculates

Both interest and other fees on a loan on an annualized basis

Could lenders with the same interest rate report different APRs?

Yes, depending on the other fees charged

Under the add-on method,

The interest is calculated on the loan amount, the loan amount and the interest are added together, and the total is divided by the number of payments to determine the amount of monthly payment

Assume that you need to borrow $700 for one year. Bank South will give you the loan at 9​%. SunCoast Bank will give you the loan at 8​% with a $25 loan origination fee. First National will give you the loan at 7​% with a $13 loan origination fee.

If you take the loan at Bank South, the amount of total interest and fees is

$63

Assume that you need to borrow $700 for one year. Bank South will give you the loan at 9​%. SunCoast Bank will give you the loan at 8​% with a $25 loan origination fee. First National will give you the loan at 7​% with a $13 loan origination fee.

If you take the loan at SunCoast bank, the amount of total interest and fees is

$81

Assume that you need to borrow $700 for one year. Bank South will give you the loan at 9​%. SunCoast Bank will give you the loan at 8​% with a $25 loan origination fee. First National will give you the loan at 7​% with a $13 loan origination fee.

If you take the loan at First National, the amount of total interest and fees is

$62

Assume that you need to borrow $700 for one year. Bank South will give you the loan at 9​%. SunCoast Bank will give you the loan at 8​% with a $25 loan origination fee. First National will give you the loan at 7​% with a $13 loan origination fee.

Which loan should you choose?

First National

What is the amortization method

M = (P x r x (1+r)^n) / (1+r)^n - 1 , where M is the monthly payment, P is the loan principal (the amount borrowed), r is the monthly interest rate (annual tae divided by 12), and n is the total number of payments (loan term in months)

Beth has just borrowed $9600 on a 4-year loan at 9% simple interest to purchase a used car. What is the monthly payment that Beth must make to the lender?

Use amortization method: M= (P x r x (1+r)^n) / (1+r)^n - 1

Monthly interest rate r = 9%/12 = 0.0075

Loan term in months = 48

M = (9600 × 0.0075 x (1 + 0.0075)^48) / (1+0.0075)^48 - 1

M = 106.38796 / 0.477455 = 238.90

Beth has just borrowed $8000 on a 6-year loan at 8% simple interest to purchase a used car. What is the monthly payment that Beth must make to the lender?

look up later

What is the no-debt solution?

Involves limiting the amount you pay to whatever you can afford to pay with cash

The limited-debt solution has

Several variations, but involves minimizing the amount you borrow for a car to an amount that can be repaid quickly

Lucas wants to buy a used car that will cost 5.5k. How much will his monthly payment be if he puts 2.5k down and finances the remainder at 6% for 2 years?

Look at later

What is not one of the disadvantages of leasing a car?

Your equity in the car is limited to your lease payments

You are considering building a new deck on your home, what factors should you consider when deciding whether to borrow the money or take the money out of your savings account?

• You should compare the after-tax return on your savings with the after-tax APR on your loan

• If you have enough liquidity to pay the monthly loan payments

Defaulting on a secured loan may lead to the collateral being repossessed. True or False?

True

What are characteristics of secured loans?

• They are easier to get

• Interest rates tend to be lower than unsecured loans

• They reduce the lender’s risk'

• They are backed with either physical or investment assets

The “Repo Man” recently repossessed your car for failure to make payments. You still owed 5k on the loan, but since it was broke, you were glad to get rid of it anyway. The bank sold the car at a wholesale auction for 3k. The bank also paid the “Repo Man” 200 and paid attorney fees of 300. Based on the deficiency payments clause on your loan, what are you liable for?

$2,500

Payday loans are a dangerous way to borrow money, and charge extremely high annual interest rates. True or False?

True

The annual percentage rate is the simple percentage cost of all finance charges over the life of the loan on an annual basis. True or False?

True

Amortization refers to the process in which a large proportion of the early payments of an installment loan goes to cover interest, and the later payments have a larger proportion going towards the payment of principal. True or False?

True

Steven is beginning a new job but has not yet been paid. He needs $400 to pay his rent this month. Steven is going to borrow the money through a Payday Loan establishment. They are charging him an $80 fee to borrow the money for 10 days until he receives his 1st paycheck. What is the actual interest rate that Steven is being charged?

730.0%

You have just graduated from college and are determining what your monthly student loan payments will be. After consolidating all of your loans, you have a balance of $18,000. At 8% APR for 10 years, what will your monthly payments be?

$218.39

You are headed to the mountains for some climbing this summer and you need some gear. The local mountaineering shop is offering 6% financing on all purchases before the end of the month. Your savings account is currently pay 5%, and you are in a marginal tax bracket of 28%. Where is it cheaper?

Taking money out of savings