Consumer Debt Products & Interest Calculations Flashcards

A credit card has a nominal annual interest rate of 24%. What is the approximate monthly periodic rate used to calculate finance charges?

Answer: 2%

The monthly periodic rate is the annual rate divided by 12; 24% ÷ 12 = 2% per month.

Which type of consumer debt is typically classified as 'unsecured'?

Answer: Credit card balance

Credit card balances are unsecured because no specific collateral backs the debt.

The Annual Percentage Rate (APR) on a loan differs from the stated interest rate because APR:

Answer: Includes fees and costs of the loan

APR reflects the true cost of borrowing by incorporating both interest and required fees, giving a standardized comparison metric.

A consumer borrows $5,000 at 10% simple interest for 2 years. How much total interest will be paid?

Answer: $1,000

Simple interest = Principal × Rate × Time = $5,000 × 0.10 × 2 = $1,000.

Which repayment structure requires equal monthly payments covering both principal and interest, with interest portion decreasing over time?

Answer: Amortizing installment

An amortizing installment loan schedules fixed payments where the interest share shrinks and the principal share grows each month.

A payday loan charges $15 per $100 borrowed for a 14-day term. What is the approximate APR?

Answer: 391%

APR ≈ (Fee/Principal) × (365/Days) × 100 = ($15/$100) × (365/14) × 100 ≈ 391%.

Which feature distinguishes revolving credit from installment credit?

Answer: Revolving credit allows repeated borrowing up to a set limit

Revolving credit lets the borrower repeatedly draw funds up to a credit limit as balances are repaid, unlike installment loans with fixed terms.