Personal Financial Planning Study Set 5

Business

Quiz 7 :

Using Consumer Loans

Quiz 7 :

Using Consumer Loans

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List and briefly discuss the different factors to consider when shopping for a loan. How would you determine the total cost of the transaction
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The different factors that affect the shopping for a loan are the financial charges, maturity period of the loan, total cost of transaction, collateral that the borrower have to pledge on the loan, terms and conditions in relation to time and date of interest payments, refunds on prepayments and penalties in case of nonpayment or delayed payment of interest.
The total cost of transaction can be arrived by summing up the total cost spent on purchase and total amount of monthly loan payments.

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Explain some strategies for reducing the cost of student loans.
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It is true that the cost of college is expensive and in fact increasing every year. Because of this, many students will need to borrow money in order to attain a higher education. Therefore, a student is wise to explore the different ways to reduce the cost of student loans.
There are a number of different ways to reduce the cost of student loans :
• First, borrow as little money as possible. Students are advised to use their expected future salary to determine how much they will be able to afford as a monthly payment. Then using student loan repayment calculators available free on the internet, the monthly payment amount can then be entered into the along with the expected interest rate on the loan to calculate the maximum amount that should be borrowed.
• Borrowers should also shop around different lenders for the lowest interest rate available.
• Students should research and apply for all available grants, scholarships, and federal student aid.
• After graduation, borrowers should explore payment assistance programs such as the Public Service Loan Forgiveness, Loan Repayment Assistance, and additional options to consolidate federal loans and to participate in an income-based repayment plan.

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Identify several different types of federally sponsored student loan programs.
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The federal government and some state governments have available several different types of subsidized educational loan programs. The different types of federally sponsored student loan programs are:
• Stafford loans (Direct and Federal Family Education Loans - FFEL)• Perkins loans
• Parent Loans for Undergraduate Students (PLUS)Stafford and Perkin loans are the loans which are directly issued and obtained by the student themselves whereas PLUS loans are the supplemental loans who do not qualify for Stafford and Perkin loans. It can be borrowed by the student's parents and guardians.

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Michael Roddick, a 27-year-old bachelor living in Charlottesville, Virginia, has been a high-school teacher for five years. For the past four months, he's been thinking about buying a Subaru Outback, but he feels that he can't afford a brand-new one. Recently, however, his friend Herb Keller has offered to sell Michael his fully loaded Subaru Outback 3.6R. Herb wants $26,900 for his Outback, which has been driven only 8,000 miles and is in very good condition. Michael is eager to buy the vehicle but has only $10,000 in his savings account at Central Bank. He expects to net $8,000 from the sale of his Chevrolet Malibu, but this will still leave him about $8,900 short. He has two alternatives for obtaining the money: a. Borrow $8,900 from the First National Bank of Charlottesville at a fixed rate of 6 percent per annum, simple interest. The loan would be repaid in equal monthly installments over a three-year (36-month) period. b. Obtain a $8,900 installment loan requiring 36 monthly payments from the Charlottesville Teacher's Credit Union at a 4.5 percent stated rate of interest. The add-on method would be used to calculate the finance charges on this loan. Critical Thinking Questions 1. Using Exhibit 7.5 or a financial calculator, determine the required monthly payments if the loan is taken out at First National Bank of Charlottesville. 2. Compute (a) the finance charges and (b) the APR on the loan offered by First National Bank of Charlottesville. 3. Determine the size of the monthly payment required on the loan from the Charlotesville Teacher's Credit Union. 4. Compute (a) the finance charges and (b) the APR on the loan offered by the Charlottesville Teacher's Credit Union. 5. Compare the two loans and recommend one of them to Michael. Explain your recommendation. REFERENCE: img A
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Define and differentiate between (a) fixed- and variable-rate loans and (b) a singlepayment loan and an installment loan.
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Use Worksheet 7.1. Every six months, Brad Stengel takes an inventory of the consumer debts that he has outstanding. His latest tally shows that he still owes $4,000 on a home improvement loan (monthly payments of $125); he is making $85 monthly payments on a personal loan with a remaining balance of $750; he has a $2,000, secured, single-payment loan that's due late next year; he has a $70,000 home mortgage on which he's making $750 monthly payments; he still owes $8,600 on a new car loan (monthly payments of $375); and he has a $960 balance on his MasterCard (minimum payment of $40), a $70 balance on his Exxon credit card (balance due in 30 days), and a $1,200 balance on a personal line of credit ($60 monthly payments). Use Worksheet 7.1 to prepare an inventory of Brad's consumer debt. Find his debt safety ratio given that his take-home pay is $2,500 per month. Would you consider this ratio to be good or bad Explain. REFERENCE: img
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Bridget Morrow is a sophomore at State College and is running out of money. Wanting to continue her education, Bridget is considering a student loan. Explain her options. How can she minimize her borrowing costs and maximize her flexibility
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Assume that you've been shopping for a new car and intend to finance part of it through an installment loan. The car you're looking for has a sticker price of $18,000. Auto Boss has offered to sell it to you for $3,000 down and finance the balance with a loan that will require 48 monthly payments of $333.67; Four Wheel Specialists will sell you the exact same vehicle for $3,500 down, plus a 60-month loan for the balance, with monthly payments of $265.02. Which of these two finance packages is the better deal Explain.
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Compare the consumer lending activities of (a) consumer finance companies and (b) sales finance companies. Describe a captive finance company.
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Discuss the role in consumer lending of (a) credit unions and (b) savings and loan associations. Point out any similarities or differences in their lending activities. How do they compare with commercial banks
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Find the finance charges on a 6.5 percent, 18-month, single-payment loan when interest is computed using the simple interest method. Find the finance charges on the same loan when interest is computed using the discount method. Determine the APR in each case.
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At age 19, Anita Turner is in the middle of her second year of studies at a community college in Charlotte. She has done well in her course work; majoring in pre-business studies, she currently has a 3.75 grade point average. Anita lives at home and works part-time as a filing clerk for a nearby electronics distributor. Her parents can't afford to pay any of her tuition and college expenses, so she's virtually on her own as far as college goes. Anita plans to transfer to the University of North Carolina next year. (She has already been accepted.) After talking with her counselor, Anita feels she won't be able to hold down a part-time job and still manage to complete her bachelor's degree program at UNC in two years. Knowing that on her 22nd birthday, she will receive approximately $35,000 from a trust fund left her by her grandmother, Anita has decided to borrow against the trust fund to support herself during the next two years. She estimates that she'll need $25,000 to cover tuition, room and board, books and supplies, travel, personal expenditures, and so on during that period. Unable to qualify for any special loan programs, Anita has found two sources of single-payment loans, each requiring a security interest in the trust proceeds as collateral. The terms required by each potential lender are as follows: a. North Carolina State Bank will lend $30,000 at 6 percent discount interest. The loan principal would be due at the end of two years. b. National Bank of Chapel Hill will lend $25,000 under a two-year note. The note would carry a 7 percent simple interest rate and would also be due in a single payment at the end of two years. Critical Thinking Questions 1. How much would Anita (a) receive in initial loan proceeds and (b) be required to repay at maturity under the North Carolina State Bank loan 2. Compute (a) the finance charges and (b) the APR on the loan offered by North Carolina State Bank. 3. Compute (a) the finance charges and (b) the APR on the loan offered by the National Bank of Chapel Hill. How big a loan payment would be due at the end of two years 4. Compare your findings in Questions 2 and 3, and recommend one of the loans to Anita. Explain your recommendation. 5. What other recommendations might you offer Anita regarding disposition of the loan proceeds
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Kevin Hams plans to borrow $8,000 for five years. The loan will be repaid with a single payment after five years , and the interest on the loan will be computed using the simple interest method at an annual rate of 6 percent. How much will Kevin have to pay in five years How much will he have to pay at maturity if he's required to make annual interest payments at the end of each year
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For many of us, new cars can be so appealing! We get bitten by the "new car bug" and think how great it would be to have a new car. Then we tell ourselves that we really need a new car because our old one is just a piece of junk waiting to fall apart in the middle of the road. Of course, we don't have the money to purchase a new car outright, so we'll have to get a loan. That means car payments. The trouble is, car payments often turn out to be a lot less affordable after we actually get the loan than we thought they would be before we signed on the dotted line. And they last way beyond the time the new car aura wears off. This project will help you understand how loan payments are determined, as well as the obligation that they place on you as the borrower. Let's assume for this project that your parents have promised to make the down payment on a new car once you have your degree in hand. They have agreed to pay 30 percent of the cost of any car you choose, so long as you are able to obtain a loan and make the payments on the remainder. Find the price of the vehicle you would like by visiting a car dealership or pulling up a Web site such as http://www.edmunds.com. Add another 4 percent to the price for tax, title, license, and so on (or ask a dealer to estimate these costs for you). Take 70 percent of the total to determine how much you'll have to finance from your car loan. Then find out what the going rate is for car loans in your area by calling or visiting your bank or by consulting a Web site such as http://www.bankrate.com. Calculate what your monthly payments would be at this rate if you financed the loan for three, five, and six years. How well do you think these car payments would fit into your budget What kind of income would you have to make to afford such payments comfortably If the payments are more than you thought they would be, what can you do to bring them down
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What two questions should be answered before taking out a consumer loan Explain.
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List and briefly discuss the five major reasons for borrowing money through a consumer loan.
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Todd Kowalski is borrowing $10,000 for five years at 7 percent. Payments are made on a monthly basis, which are determined using the add-on method. a. How much total interest will Todd pay on the loan if it is held for the full five-year term b. What are Todd's monthly payments c. How much higher are the monthly payments under the add-on method than under the simple interest method
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As a college student, what aspects of these student loan programs appeal to you the most
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Using the simple interest method, find the monthly payments on a $3,000 installment loan if the funds are borrowed for 24 months at an annual interest rate of 6 percent. How much interest will be paid during the first year of this loan (Use a monthly payment analysis similar to the one in Exhibit 7.6.) img
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Kristin Simon needs to borrow $4,000. First State Bank will lend her the money for 12 months through a single payment loan at 8 percent, discount; Home Savings and Loan will make her a $4,000, single-payment, 12-month loan at 10 percent, simple interest. From where should Kristin borrow the money Explain.
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