3. Characteristics of single-payment or installment loans andfixed- or variable-rate loans
Single-Payment versus Installment Loans, and Fixed-Rate versus Variable-Rate Loans
Payments on consumer loans are described by the terms of the loan. When the loan is paid is one factor. An installment loan is paid either periodically over the life of the loan, usually monthly, and a single–payment loan is what the name implies: a loan whose entire balance is paid at once, usually ranging from a month to a year after the loan is made. Interest charged on the loan is another factor. Rates are either fixed or variable. A fixed rate is the same throughout the life of the loan. A variable rate may change over the life of the loan and is usually tied to current market conditions.
Cho and Ginny both needed loans, but they had different reasons, personalities, and financial positions. They each had to choose between obtaining a single-payment or an installment loan.
Cho
Cho wanted to rent a share in a ski house for the upcoming winter, a six-month season. The house owner would not allow Cho to pay the rent in six equal payments over the course of the ski season and, instead, required full payment up front. Cho found an investment opportunity promising a 7% annual return. She also found a loan with a 4% annual interest rate. She decided to take out the loan to pay the landlord the full amount of the rental. Every month, Cho planned to deposited one sixth of the loan amount (or what would have been the monthly rental payment) into the investment and take the chance that the investment would return what it promised.
Cho most likely took out loan because she .
Ginny
Ginny needed a loan and knew that she would be less likely to default if subject to monthly, fixed payments.
Ginny most likely took out loan because .
Lucia and Sharon both needed loans, but they had different reasons, personalities, and financial positions. They each had to choose between obtaining a fixed-rate or variable-rate loan.
Lucia
When Lucia took out a loan, she wanted the security of knowing what her monthly payments would be and for how long.
Lucia most likely took out a loan because the monthly payment and number of payments .
Sharon
Sharon needed a long-term loan, somewhere between 15 and 30 years. She learned that the longer the term, the fewer rate options she had. Sharon finally had to go with the 30-year loan.
Sharon most likely took out a loan because