Harding University - Personal Finance - Exam 2

Guidelines for purchasing Decisions

- Research purchase thoroughly considering the market and the personal needs

- Base the selection on the needs

- Negotiate the best price and arrange financing on favorable terms

- Understand all the terms of the sale before signing contract

Factors that Affect Affordability

- Amount of down payment

- Operating cost

- Type of vehicle (gas, diesel, hybrid, etc.)

- Other considerations (Trading in/selling, fuel economy, safety measures)

What is sticker price?

Manufacturer's suggested retail price.

negotiating price

most sellers will accept less than their asking price/sticker price

when buying a car, do not reveal what you can afford to the seller t/f

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What is a sales contract?

Agreement to purchase an automobile with price and conditions.

What is anchoring?

Bias in which individual tends to allow initial estimate dominate subsequent assessment regardless on new information on the contrary

What is a lease?

Arrangement where the lessee receives use of asset's in exchange for monthly payment

What is a closed-end lease?

Lease where lessee can walk away at the end.

Why lease? (5 reasons)

Rising car prices, lower monthly payments, driving a more expensive car for same monthly payment, minimizing downpayment to preserve cash, don't have to worry about loan process

Why not lease? (4 reasons)

No ownership (you have nothing when lease ends), limited miles, down payment, most leases are 3-4 years length (you keep vehicle for this long)

What are the steps to buying a house?

Get pre-approved for a loan, select realtor, research homes.

What are foreclosures?

Lenders attempt to recover loan balances from borrowers who have quit paying by forcing the sale of a home pledged as collateral (When a house is repossessed and sold by the bank)

What is a down payment?

Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased

What is private mortgage insurance (PMI)?

Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan

Earnest Money

a sum of money you put down to demonstrate your seriousness about buying a home - another term for down payment

What are closing costs?

Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property

What is the interest in a house payment?

Amount collected by the bank.

What is the principal in a house payment?

Reduces the loan balance.

What are property taxes?

taxes on assessed value of real estate; levied by the local government on the assessed value of real estate for the purpose of funding schools, law enforcement, etc

What is homeowners insurance?

Covers replacement value of home and contents; required by mortgage lenders and covers replacement value of a home and its contents

What are average home prices in the US?

$366,000 for a 4-bedroom, 2400 sqft house.

average home sale price in US as of 2024

$412,000

What should you not do when negotiating price?

Don't fall in love with the car or express desperation.

What is the purpose of researching homes when buying a house?

To gather information and compare options.

What is escrow?

A legal arrangement in which a third party temporarily holds money or property until a particular condition has been met.

How does an escrow account work?

The bank collects taxes and insurance and pays them annually on behalf of the borrower.

When is an escrow account used?

When the borrower cannot put 20% down on a property.

What is a contingency clause?

A clause in an agreement that makes it conditional on factors such as financing availability, property inspections, or obtaining expert advice.

What is a fixed rate mortgage?

A mortgage where the interest rate and monthly payment remain fixed over the full term of the loan.

What is an adjustable-rate mortgage (ARM)?

A mortgage where the interest rate is adjusted based on market interest rates.

What is a conventional mortgage?

A mortgage offered by a lender who assumes all of the risk of loss

What is Federal Housing Administration (FHA) mortgage insurance?

Insurance offered to lenders on loans with a high loan-to-value ratio, encouraging loans to home buyers with little money available, for a downpayment and closing costs

What is a VA loan guarantee?

A loan for the military that is guaranteed by the Department of Veterans Affairs - to lenders who make qualified mortgage loans to eligible veterans of the armed forces and their unmarried surviving spouses

Why does the bank want to get as much interest as possible on the front end?

To compensate for the possibility of the loan being paid off early.

What happens to the principal over time?

It increases as the borrower makes payments.

What happens to the interest over time?

It decreases as the principal is paid down.

What is the basic concept of credit?

borrowing money, or use credit to improve credit history

Why do people use credit?

To avoid paying cash for large expenses (large outlays), meet financial emergencies, for convenience, or for investment purposes.

What is the improper use of credit?

Using credit to meet basic living expenses, make impulse purchases, or purchase non-durable goods.

How much credit can I handle?

monthly repayment should not exceed 20% of your monthly take home pay (this is max - 10-15% is better)

How can someone establish credit?

By opening checking and savings accounts, using credit cards, obtaining a small loan, and building a strong credit history.

What are the 5 C's of credit?

Character (credit score and history), Capacity (ability to repay based on income and financial obligations), Collateral (property or assets that can be used as security if you don't make payments) Capital (assets and net worth), and Conditions (economic and industry factors - how you intend to use the money).

Collateral

Savings or assets that can be claimed if payments are not made

Capital

money for investment; amount of money someone has (ex:CD)

Conditions

Factors that determine how much credit you can handle or how you intent to use it

Credit investigation

Evaluation of borrower's creditworthiness based on income and debt of borrower (and their age/employment history)

Credit Bureau

Equifax, Experian, TransUnion

Improving FICO credit score

Pay bills on time, get current on missed payments, keep credit card balance low, pay off debt, don't open new credit cards

Credit card fraud

Theft of credit, debit, or payment cards for unauthorized use/as a fraudulent source of funds when making transactions

purpose of one committing credit card fraud

obtain goods without paying to obtain unauthorized funds from an account

Types of fraud

Stealing a card, using a lost or found credit card, account takeover, counterfeit cards, intercepted mailed cards, fraudulent applications

Account takeover

Using personal information to contact credit card company or bank

Counterfeit cards

Creating and using duplicate cards with illegally obtained account information (after illegally obtaining information)

Intercepted mailed cards

Stealing cards from the mailbox

Fraudulent applications

Using personal information to apply for credit in someone else's name (date of birth (DOB), social security number (SSN))

What to do if you're a victim

Contact credit card company, monitor account activity, change passwords, check bank statements, request credit report, add fraud alert, receive activity notifications when activity on card occurs

How to prevent credit card fraud

Secure wallet/purse, don't carry SS card, only carry necessary credit cards you need and will use, shop on secure websites

What is a credit score?

A numerical representation of an individual's creditworthiness.

What are the 5 factors that affect credit score?

Payment history, amounts owed, length of credit history, types of credit in use, new credit.

What are the potential effects of a low credit score?

Difficulty in renting, landing a job, obtaining car insurance, home insurance, and utility deposits.

overall, how can one fix their credit score?

By paying bills on time and using credit cards sparingly.

Improving FICA credit score

1. if you miss payments, go current and stay current

2. pay off debt and do not move it around

3. keep credit card balance low

4. if having trouble making ends-meet contact creditors and work out a payment lan

5. don't open new credit cards to increase available credit

HELOC

Home Equity Line of Credit

Home Equity Line of Credit (HELOC)

A set amount of available cash that can be used at the account holder's discretion and repaid over time

advantages of HELOC

you can tap into entire amount of equity in you name (cap at 75-80%), you don't have to get pre-approved for a new loan, interest charges are tax deductible for those who itemize taxes

disadvantages of HELOC

-Interest rates are often a bit higher

-You generally have to pay an annual fee

4 ways to avoid credit problems

1. use discipline when purchasing

2. reduce number of cards

3. limit new charges

4. pay more than the minimum payment

Define bankruptcy

petition for request for protection from creditors

Bankruptcy - first most common reason for filing

second chance to regain control of your finances by having most of your unsecured debt - this legal process allows individuals to discharge most of their unsecured debts, like credit card balances, medical bills, and personal loans, by liquidating non-exempt assets, essentially giving them a fresh start financially

dischargeable debts

debts that can be erased by going through bankruptcy

types of dischargeable debts

credit card balances, collection agency accounts, medical bills, personal and payday loans, mortgage

types of non-dischargeable debts

child support, alimony, HOA fees, personal injury debts owing to an event when you were intoxicated, student loans

biggest negative of bankruptcy

bankruptcy on credit report for 10 years will make it difficult to get any new credit or low interest rates for a car or home

Bankruptcy - second most common reason for filing

to eliminate debts by creating a plan to repay all/some debt over 3-5 years by making monthly payments

5 Factors Considered to Determine Credit Score

1. 35% payment history

2. 30% amounts owed

3. 15% length of credit history

4. 10% type of credit loans in use

5. 10% new credit

credit score range

300 (low) to 850 (high)

good credit score range

700-850