Consumer Debt Products & Interest Calculations Flashcards

Under the Truth in Lending Act (TILA), lenders must disclose the APR primarily to help consumers:

Answer: Compare the true cost across different loan offers

TILA mandates APR disclosure so consumers have a standardized metric to compare financing costs across competing offers.

A consumer has a $10,000 auto loan at 6% annual interest amortized over 48 months. If the monthly payment is approximately $235, how much of the FIRST payment is interest?

Answer: $50

First-month interest = $10,000 × (6%/12) = $10,000 × 0.005 = $50.

Which consumer debt product typically carries the highest average interest rate?

Answer: Credit card

Credit cards routinely carry the highest rates among common consumer debt products, often ranging from 18% to over 30% APR.

A 'teaser rate' on a credit card is best described as:

Answer: A temporary promotional APR that resets to a higher standard rate

Teaser rates are introductory promotional APRs offered for a limited period before reverting to the card's standard (higher) APR.

The Credit CARD Act of 2009 restricts credit card issuers from applying rate increases to:

Answer: Existing balances already carried on the account

The Credit CARD Act prohibits retroactive rate increases on existing balances, protecting consumers from sudden cost increases on debt already incurred.

Compound interest differs from simple interest in that compound interest:

Answer: Accrues interest on both principal and previously earned interest

Compounding calculates interest on the accumulated balance (principal plus prior interest), causing balances to grow faster over time.

A debt consolidation loan is most beneficial when it:

Answer: Carries a lower interest rate than the existing debts

The primary benefit of debt consolidation is replacing multiple high-rate debts with a single lower-rate loan, reducing total interest paid.