FIN533 Chapter 4: Consumer Credit and Debt Management
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Questions and Answers

What will determine the mortgage payment amount?

  • Cost of Credit
  • BR
  • BLR
  • ELR (correct)

    • What is the relationship between loan term and total interest paid?

  • Longer loans result in higher total interest (correct)
  • Longer loans result in variable total interest
  • Longer loans result in lower total interest
  • Longer loans have no effect on total interest

    • What type of interest is computed only on the principal amount?

  • Compound interest
  • Variable interest
  • Simple interest (correct)
  • Fixed interest

    • How can a lender's risk be reduced?

    <p>By providing collateral to secure the loan</p> Signup and view all the answers

    What must banks continue to display on their branches and websites?

    <p>Both the BLR and BR</p> Signup and view all the answers

    What is the primary purpose of the Fair Debt Collection Practices Act?

    <p>To regulate debt collection agencies</p> Signup and view all the answers

    What is the time frame within which a debt collector must send a written notice after an initial phone call?

    <p>Five days</p> Signup and view all the answers

    What is the consequence of not requesting verification of the debt within 30 days?

    <p>The debt collector can continue to communicate with the debtor</p> Signup and view all the answers

    Which of the following is NOT a reason for debt mentioned in the text?

    <p>Financial difficulties due to job loss</p> Signup and view all the answers

    What is the consequence of verifying the debt within 30 days?

    <p>The debtor must pay the debt</p> Signup and view all the answers

    What is the formula for calculating the dollar cost of borrowing?

    <p>PxrxT</p> Signup and view all the answers

    Which method of calculating interest is based on the full amount of the original principal?

    <p>Add-on interest</p> Signup and view all the answers

    What is the main difference between the average daily balance method and the two-cycle average daily balance method?

    <p>The average daily balance method is used for one billing cycle, while the two-cycle average daily balance method is used for two consecutive billing cycles</p> Signup and view all the answers

    According to the previous balance method, how are finance charges calculated?

    <p>By giving no credit for payments made during the billing period</p> Signup and view all the answers

    What is the primary advantage of seeking an inexpensive loan from parents or family members?

    <p>No need for collateral</p> Signup and view all the answers

    What is the main purpose of the annual percentage rate (APR)?

    <p>To compare rates with other sources of credit</p> Signup and view all the answers

    What is the main objective of managing your debts?

    <p>To develop a plan to manage your debts</p> Signup and view all the answers

    What type of loan would require a Certificate of Deposit (CD) as collateral?

    <p>Asset-based loan</p> Signup and view all the answers

    What is the monthly rate if the APR is 18%?

    <p>11/2%</p> Signup and view all the answers

    What is the primary difference between a base rate and a BLR (Base Lending Rate) in Malaysia?

    <p>Base rate is fixed, while BLR is variable</p> Signup and view all the answers

    What is the main purpose of calculating the finance charge?

    <p>To determine the total cost of credit</p> Signup and view all the answers

    What is the primary advantage of seeking a medium-priced loan from commercial banks, savings and loan associations, and credit unions?

    <p>Wider range of loan options</p> Signup and view all the answers

    What is a sign of debt problems if you consistently pay only the minimum balance each month?

    <p>You are increasing the total balance due each month</p> Signup and view all the answers

    What is a consequence of going over your credit limit on credit cards?

    <p>Your credit card will be revoked</p> Signup and view all the answers

    What is a recommended action if you can't pay your bills?

    <p>Postpone further credit purchases, talk with your creditors, or seek help from a non-profit credit counseling service</p> Signup and view all the answers

    What is a sign of debt problems if you are using up your savings to pay routine bills?

    <p>You are having financial difficulties</p> Signup and view all the answers

    What is a consequence of not knowing how much you owe?

    <p>You will have financial difficulties</p> Signup and view all the answers

    In Malaysia, which organization provides assistance to consumers with debt problems?

    <p>Agensi Kaunseling dan Pengurusan Kredit (AKPK)</p> Signup and view all the answers

    Study Notes

    The Cost of Credit

    • Dollar cost of borrowing: I = PxrxT
    • Simple interest: calculated on the declining balance, interest is paid only on the amount of original principal not yet repaid
    • Add-on interest: interest is calculated on the full amount of the original principal, added to the principal, and the total of both is divided by the number of payments to be made

    Cost of Open Credit

    • Adjusted balance method: finance charges are calculated after payments made in the billing period have been subtracted
    • Average daily balance method: creditors add balances for each day in the billing period, divide by the number of days, and multiply by the monthly interest rate
    • Two-cycle average daily balance method: creditors use average daily balance for two consecutive billing cycles
    • Previous balance method: gives no credit for payments made during the billing period

    Managing Your Debts

    • Notify creditors if you can't make a payment
    • Objective: develop a plan to manage your debts

    Tackling the Trade-Offs

    • Term versus interest costs: longer loans-lower payments, but more total interest
    • Lender risk versus interest rate: ways to reduce the lender's risk and the interest rate include accepting a variable interest rate, providing collateral, making a large down payment, and having a shorter loan term

    The Cost of Credit (continued)

    • Simple interest: computed on principal only and without compounding

    Sources of Consumer Credit

    • Inexpensive loans: parents or family members, loans based on assets (e.g. using Certificate of Deposit (CD) as collateral)
    • Medium-priced loans: commercial banks, savings and loan associations, and credit unions
    • Expensive loans: finance and check cashing companies, retailers such as car or appliance dealers, and bank credit cards and cash advances

    The Cost of Credit (continued)

    • Finance charge: the total dollar amount you pay to use credit, including interest costs, service charges, credit-related insurance premiums, or appraisal fees
    • Annual percentage rate (APR): the percentage cost of credit on a yearly basis, used to compare rates with other sources of credit

    Base Rate Vs. BLR in Malaysia

    • Base Rate (BR) replaced the Base Lending Rate (BLR) in Malaysia
    • Banks are still required to display both BLR and BR on their branches and websites

    Warning Signs of Debt Problems

    • Paying only the minimum balance each month
    • Increasing the total balance due each month
    • Missing or alternating payments or paying late
    • Intentionally using overdraft protection or taking frequent cash advances
    • Using savings to pay routine bills
    • Getting second or third payment notices
    • Using up your savings
    • Borrowing money to pay old debts
    • Not knowing how much you owe
    • Going over your credit limit on credit cards
    • Having little or no savings for the unexpected
    • Being denied credit due to a credit report
    • Having a credit card revoked by the issuer

    Consumer Credit Counseling Services

    • Non-profit credit counseling services can assist consumers with debt problems
    • In Malaysia, Agensi Kaunseling dan Pengurusan Kredit (AKPK) provides credit counseling services
    • The Fair Debt Collection Practices Act regulates debt collection agencies

    Managing Your Debts (continued)

    • If you can't pay your bills, postpone further credit purchases, talk with your creditors, or seek help from a non-profit credit counseling service
    • You can dispute the debt or pay it within five days of receiving a written notice from the debt collector
    • You can request verification of the debt within 30 days

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    Description

    Test your understanding of consumer credit sources, debt management, and interest calculations. Learn how to evaluate private and governmental sources that assist with debt problems.

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