personal finance test

What is amortization?

The process of paying off a debt in regular installments over a specific period of time.

What is a minimum payment?

The smallest amount you can pay each month on a credit card to keep the account in good standing and avoid late fees.

What is a variable-rate loan?

A loan where the interest rate can change over time based on market conditions.

What is a payday loan?

A high-interest, short-term loan that usually must be repaid by the borrower's next paycheck; it is often considered a risky financial option.

What is a mortgage?

A specific type of loan used to purchase a home or real estate.

What is an authorized user?

A person added to another individual's credit card account, allowing them to use the card and build their own credit history.

What is secured debt?

Debt that is backed by collateral (such as a car or a house), which the lender can take if the loan is not repaid.

What is a down payment?

An upfront payment made when buying something expensive on credit (like a car or house), which reduces the total amount of money needed to be borrowed. For example, paying 20\% of the price upfront.

Define Principal, Interest, and Term.

1. Principal: The original amount of money borrowed.
2. Interest: The additional cost paid for the privilege of borrowing money.
3. Term: The length of time agreed upon to repay the loan.

What is a credit limit?

The maximum amount of money a person is allowed to charge to a specific credit card.

How is Net Worth calculated?

Net worth measures overall financial health and is calculated as: \text{Assets} - \text{Liabilities} = \text{Net Worth}

Classification of Credit Types

• Auto Loan: Installment
• Student Loan: Unsecured
• Personal Loan: Fixed
• Mortgage: Secured
• Adjustable-Rate Mortgage: Variable
• Credit Card: Revolving

Comparing Debit, Credit, and Prepaid Cards

• Debit: Linked to checking account balance; may have overdraft fees.
• Credit: Helps build credit scores; charges interest; often offers rewards and fraud protection for travel.
• Prepaid Debit: Spend only the preloaded limit; does not build credit.

Why should someone use a credit card?

People use them to build a credit history, earn rewards (like points or cash back), benefit from purchase protection/fraud defense, and pay for items over time.

How can people under age 21 build credit?

• Become an authorized user on a parent's account.
• Apply for a secured credit card.
• Use a cosigner for a loan.
• Take out a student loan and make on-time payments.

What identifies 'Good' vs. 'Bad' credit advice?

• Good Advice: Look for a low APR (Annual Percentage Rate) and a long grace period.
• Bad Advice: Accepting a card with a very high annual fee.

What is the purpose of a Schumer Box?

A standardized table that displays important information about a credit card, including its APR, fees, penalties, and grace periods, helping consumers understand the true cost.

What happens if you only pay the minimum on a credit card balance?

Interest adds up quickly, you stay in debt much longer, and the total cost of your purchases becomes significantly more expensive.

Why do people have different views on debt?

Perspectives are influenced by income levels, past personal experiences with money, financial education, and cultural or family values.

How does the loan term affect payments?

A longer term results in lower monthly payments but increases the total amount of interest paid over the life of the loan.

How do payments work in an amortized loan?

Payments are fixed and cover both principal and interest. Making extra payments or paying more than the minimum saves money by reducing the principal faster and lowering total interest.

Factors that change Auto Loan payments

• Decrease Payments: Large down payment or a long loan term.
• Increase Payments: Low credit score or a high APR.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARM)

• Fixed-Rate: The interest rate and monthly payment remain the same, providing predictability.
• Adjustable-Rate (ARM): The interest rate can change, meaning payments may go up or down, which is riskier.

Strategies for saving money on a mortgage

• Improve your credit score before applying.
• Provide a larger down payment.
• Compare different lenders.
• Choose a shorter loan term if the higher monthly payment is affordable.

What is the 'Debt Cycle' of payday loans?

Due to extremely high fees and short deadlines, borrowers often cannot afford to pay the loan back and must take out another loan to cover the first one, trapping them in debt.

Why are payday loans easy to obtain?

They typically require no credit check, no collateral, and offer almost instant approval.

Why are auto loans sometimes seen as 'bad debt'?

Because cars are depreciating assets (they lose value over time). However, they can be considered reasonable debt if the car is necessary for work and the loan is affordable.

What is 'Buy Now, Pay Later' (BNPL)?

A service that splits a purchase into smaller interest-free installments.

• Advantage: No interest if paid on time.
• Disadvantage: It is easy to overspend or incur fees for missed payments.