Chapter 4 Exam

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What is a finance charge?

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A finance charge is the cost of borrowing money, typically expressed as a percentage of the amount borrowed, which includes interest and any additional fees.

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How do you calculate the total cost of a loan?

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Total cost of a loan = Principal + Finance Charges.

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What is the formula for calculating average daily balance?

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Average Daily Balance = (Sum of daily balances) / (Number of days in billing cycle).

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What does APR stand for and what does it represent?

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APR stands for Annual Percentage Rate, representing the yearly interest rate charged on borrowed money.

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How do you determine the monthly payment for a loan?

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Monthly Payment = (Principal × Monthly Interest Rate) / (1 - (1 + Monthly Interest Rate)^-Number of Payments).

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What is the significance of a down payment?

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A down payment is an initial payment made when purchasing an expensive item, reducing the amount financed and often affecting loan terms.

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How do you calculate the total amount paid over the life of an installment loan?

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Total Amount Paid = Monthly Payment × Number of Payments.

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What is the purpose of a loan amortization schedule?

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A loan amortization schedule outlines each payment over the life of the loan, showing how much goes toward principal and interest.

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What is the difference between secured and unsecured loans?

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Secured loans are backed by collateral, while unsecured loans are not, making the latter riskier for lenders.

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What is the impact of a higher APR on loan payments?

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A higher APR increases the total interest paid over the life of the loan, resulting in higher monthly payments.