Consumer Education
Mr. Rubin de Celis
Chapter 16 Review
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When credit first began in this country, did loans have high interest rates? Explain.
Yes, loans had high interest rates that exceeded 25 to 50%, and loans were made only in
emergencies. Most people and banks knew little about how credit worked. Banks
charged high interest rates and were reluctant to lend large sums of money. Also, most
people did not accept debt.
Why, when credit began, were brokers and merchants reluctant to lend money and give
credit?
They were reluctant to lend money because they knew very little about credit. Merchants
and banks did not want to take on big risks with their own clients.
How has credit affected the American economy?
The American economy grew at a healthy pace. People were buying luxuries as well as
necessities with help of credit. The American’s standard of living rose, and business and
consumers benefitted.
What kinds of jobs are created by credit?
Both government and private agencies were formed to assist consumers with their rights
and responsibilities. In the 1970’s credit counselors came on the scene because people
were beginning to overuse credit. 1990’s saw a record number of individuals were
declaring bankruptcy.
List four advantages of using credit.
 Expand your purchasing power
 Making payment on time helps establish credit
 Provides for emergency funds – line of credit
 Credit is convenient
List four disadvantages of using credit.
 Credit purchases can cost more
 Finance charge are too high
 You tie up future income
 Over spending
What are the four major types of credit?
 Open ended credit
o Charge cards
o Credit cards – revolving credit
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Closed end credit
o Installment credit – for specific amount
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Service Credit
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How is open end credit different from closed end credit.
Open ended credit – an unsecured loan based entirely on your character and credit history
30 day account – charge card
Revolving account – credit cards
Closed end credit – installment credit or short term credit where there is collateral
pledged.
Give three examples of service credit.
 Doctors
 Lawyers
 Dentists
 Hospitals
 Utility companies
How are consumer finance companies different from sales finance companies?
Finance companies – Consumer loans buying durable goods
Sales Finance Companies – make loans through authorized representatives to purchase
high end products – General Motor cars – GMAC
List the five major sources of credit for consumers.
 Retail stores
 Finance companies
 Sales finance companies
 Banks and credit unions
 Pawnshops
 Private lenders
 Life insurance companies
Why do credit unions offer lower interest rates on loans than do Commercial Banks.
Credit unions make loans available to their members only. Interest rates are generally
lower because credit unions are nonprofit and are for members only. Credit unions are
more willing to lend money to their members because each member has a stake in the
success of the Union.
Why do finance companies charge high rates of interest on their loans?
Finance companies charge higher rates because they are willing to take on higher risk.
Fiancé companies are second to banks in volume of credit. Finance companies are
allowed to lend up to $5,000.
Explain how pawnshops work.
Pawnshop is a legal business that makes high interest loans based on the value of the
pledged collateral. A pawnbroker will only give 10 – 25 % of the value of any article. The
loan is usually for 2 weeks to 6 months.
Explain the difference between a secured and an unsecured loan. In your discussion please include an
example of each.
Secured loan is also referred to as a closed end loan. This loan is an installment loan in which you
pledge either a down payment or the article you are buying as collateral.
Unsecured loan is referred to as a open ended loan because your line of credit is based on your credit
history. The type of credit can be both a charge card – 30 day account or a credit card – revolving
account.
What is your liability and responsibility if your credit card is lost or stolen.
Your liability amount if your card is lost or stolen is $50.
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