Finance Chapter 5

Why do many people use loans to accomplish short and long-term financial goals?

Loans allow people to purchase and receive the benefits from goods and services while paying for them.

unsecured loan

without collateral, requires good credit score

secured loan

with collateral to reduce risk of not paying

Is it better to have a fixed or variable-rate loan? Explain.

Fixed-rate loan because rate of interest will not change, easier long-term budget planning

advantages of financial institution such as a bank or credit union for a consumer loan

lending process is more straightforward without expensive add-ons and dont require to buy specific product or service

disadvantages of financial institution such as a bank or credit union for a consumer loan

apart from the interest rate, they also charge loan fees

advantages of obtaining financing from the retailer or service provider.

it may be less expensive than financing with a credit card

disadvantages of obtaining financing from the retailer or service provider.

promote low costs but make higher prices , include add-ons of unwanted services or payment insurance.

advantages of borrowing from friend or family

may not charge interest, offer flexible repayment terms, no worries about having good credit score

disadvantages of borrowing from friend or family

can lead to hard feelings because they may expect you to manage your finances a certain way

peer-to-peer (p2p) lending

you borrow money from an individual or group instead of borrowing from a financial institution or business.

advantages of p2p to borrower

they have various options of interest rates and other terms depending on the lender you choose

advantages of p2p to lender

they earn more interest than they would by simply putting their money in a depository institution.

Would you consider taking out a loan on a P2P platform?

Yes, I can have different options of lenders that can be better than getting a loan from a financial institution

Would you consider lending money on a P2P platform?

Yes, i can earn more interest for my savings.

six types of information you will typically need to provide on a loan application.

length of residence, employment, sources of income, finances, assets, and liabilities.

Why doesn’t having a good credit score guarantee you will be able to get the loan you want?

your credit score alone will only determine how low the interest rate will be. Lenders are looking for stability and sound finances, such as your income and current debt load.

How is a home mortgage different than other types of consumer loans?

longer duration, such as 15 to 30 years, and interest is tax-deductible for those who itemize deductions.

Home equity loans or home equity lines of credit usually offer the lowest interest rates of all consumer loans. What are the drawbacks to using them?

origination fees, your home is a collateral, you dont receive 80% of their home equity automatically

1st advantage of credit card

Widely accepted because many retailers and service providers will not accept personal checks for large payments.

2nd advantage of credit card

Purchase protection offers fraud protection.

3rd advantage of credit card

Interest-free short-term loan provides you with an interest-free loan, if you pay your full monthly balance on time.

disadvantage of credit card

fraud risk because the theft of credit card information has been very common.

Raphael is planning to buy an expensive gaming laptop computer for $1,700. He has saved the money but is considering buying it with his credit card instead, and then paying the balance in full when due. What potential advantages might he gain by doing so?

Interest-free short-term loan

If you wanted to apply for your first credit card or get an additional card, what would be your main considerations when evaluating potential card offers?

interest rates to obtain a low APR if you plan to carry a balance

How is credit utilization determined?

dividing the credit card balance by the credit limit

what is the best strategy when it comes to credit utilization?

having multiple credit cards rather than having one credit card with high utilization.

What are the disadvantages of using credit card convenience checks?

no grace period, interest begins accumulating once the check is written, fee of 3% for their use, counts towards credit utilization

Describe the steps you should take if you lose your credit card.

contact the card issuer in a timely manner, and report as soon as possible to reduce liability

Under what circumstances should you challenge a charge on your credit card statement?

a billing error when reviewing your online account detail or monthly statement.