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Chapter 6: Student and Consumer Loans- The Role of Planned Borrowing

Terms in this set (27)

Which of these is a leading cause of bankruptcy?
A major illness; include divorce, job loss, and simply living beyond your means
__________ are loans that have an interest rate that is tied to some market rate of interest such as T-bill rates.
Adjustable-interest rate loans
Another name for a single payment loan is a(n):
balloon loan; one that is repaid at the end of the term with one payment
Federal student loans that are subsidized mean that the student does not have to:
pay loan interest while still in school.
During a student loan __________ interest continues to accrue but you do not have to make payments.
forbearance
Income-based repayment plans set payments based on a percentage of your discretionary income:
and not the amount owed.
Payday loans are a predatory lending practice that commonly have APRs:
that are several hundred percent.
The interest rate that banks charge their most creditworthy customers for loans is known as the:
Prime Rate
A __________ is a tax-advantaged savings plan that encourages saving for future college costs.
529 plan
Lashawna borrowed $5,000 for one year using a discount method loan with a stated interest rate of 5%. What is the APR of her loan?
5.26%

APR = loan cost/loan proceeds
Loan Cost is equal to .05 x $5,000 = $250
Loan proceeds are $5,000 - $250 = $4,750
The APR = $250/$4,750 = .0526 or 5.26%.
A loan that creates a formal contract between the lender and the borrower with the payment details specified in the agreement is known as a:
consumer loan; the contract spells out the exact repayment details including the payment amount, due dates, and all interest charges.
Jana's home was recently appraised for $315,000 and she currently owes $161,000 on her mortgage. How much can Jana borrow using a home equity loan if the bank indicated they would loan up to 80% of the value of her equity?
$123,200

Jana's equity is equal to the value of her home minus the amount of her first mortgage. So, her home equity = $315,000 - $161,000 = $154,000. She can borrow up to 80% of that amount. Her loan maximum is therefore $154,000 x .80 = $123,200.
Filing for bankruptcy does not eliminate:
student loan debt.
Under some __________ clause agreements a lender can garnish your wages to satisfy the debt obligation.
recourse; the recourse clause in the lending agreement outlines the actions a lender can take to recover loan deficiencies in case you default
Acceleration Clause:
states that the entire loan is due in full if you miss a payment. If you do not have the money to pay the entire loan the lender can repossess the collateral and sell it to satisfy the loan obligation.
The type of bankruptcy that is known as a wage earner's plan is:
Chapter 13;
Chapter 13 bankruptcy works with you and your creditors to design a repayment schedule that will allow you to repay most, if not all, of your debt.
Chapter 7 Bankruptcy:
is reserved for someone that does not have any possibility of repaying their debts. Under Chapter 7 most assets are liquidated and the money used to repay some of your debts
Installment loans require periodic payments of principal and interest at equal intervals and are commonly used to finance:
large purchases such as cars and boats
Collateralized loans, or secured loans, will __________ interest rate relative to unsecured loans.
have a lower
A(n) __________ clause states that the entire loan is due in full if you miss a payment.
Acceleration Clause
The percentage of your take-home pay that is consumed by non-mortgage debt such as car payments and student loans is called your:
debt limit ratio
If you find that you are having difficulty paying your bills your first step should be to:
contact your creditors and try to work out a different payment plan
The interest rate that factors in true cost of a loan including most of the up-front fees is called the:
APR
A(n) __________ clause states that if you default on a loan and the sale of the repossessed property does not satisfy the entire amount of the loan obligation you are responsible to pay the remainder.
Deficiency Payments Clause
Rafael borrowed money using a home equity loan with an interest rate of 6.5%. What is the after-tax cost of this loan if he is in a 28% marginal tax bracket?
4.68%
You compute the after-tax rate by taking the stated rate of 6.5% and multiplying it by a factor computed as (1 - marginal tax rate).
So, Rafael's after-tax cost is
= 6.5(1 - .28) = 4.68%
A secured loan that uses the accumulated equity in your home as collateral is known as a:
home equity loan
Terrel is considering buying a car for $20,500 that he can finance for 5 years at 6%. How much will Terrel's monthly payment be if he buys the car?
$396.32
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