Economics Unit 4 (Chapter 10) #2

Finance Charge

The total amount of fees and interest charged

Loans

Consist of principal (amount borrowed), interest (cost of borrowing), and fees

Principal

The amount of money you borrow (the loan) that must be repaid

Interest

The cost of borrowing

Calculated based on the remaining loan balance

Loan Fees

Extra charges from a lender for making, managing, or missing payments on a loan

Amortization

The process of paying down a loan with regular payments

Amortized Loan (and Amortization)

A loan paid off through regular, equal payments over time. Amortization is the process of paying it down with regular payments

Collateral

Something of value that secures a loan

Annual Percentage Rate (APR)

The total yearly cost of a loan, combining the interest rate and required lender fees

Fixed Installment Loan

Maintains the same interest rate throughout the term

Variable Installment Loan

Has interest rates that can change during repayment

*Loan Payment Characteristics

• Each loan payment covers both interest and principal

• Early loan payments have higher interest portions; later payments have higher principal portions

Credit Card

Revolving credit that can be used at the borrower’s discretion

*Credit Card Characteristics

• Credit card costs can include annual fees, interest, and account setup fees

• Credit cards have different APRs (annual percentage rate) for purchases, balance transfers, and cash advances

Traditional Loans

Typically amortized with fixed payments

Co-Signer

An additional person responsible for the debt if the primary borrower defaults

Secured Credit Card

Requires a deposit equal to the credit limit as collateral

Reward Credit Card

Provides benefits based on purchase amounts

Grace Period

The time allowed to pay without incurring interest (minimum 21 days for new purchases)

Minimum Payment

Typically a percentage of the balance or a fixed amount, whichever is higher

CARD (Credit Card Accountability, Responsibility, and Disclosure) Act of 2009

Requires clear monthly statements showing payment information