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Exercise 11.1 Answers

Credit allows people to obtain money they do not currently have by repaying the amount borrowed plus interest. The advantages of using credit include enabling the purchase of valuable assets and helping with emergency expenses, while the disadvantages are that goods cost more and heavy credit use can lead to overextension and less money left for other expenses. Sources of credit include banks, credit unions, consumer finance companies, and utilities/medical providers who extend service credit. Interest is the price paid for using someone else's money, while collateral backs loans and can be repossessed if the loan is not repaid.

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43 views1 page

Exercise 11.1 Answers

Credit allows people to obtain money they do not currently have by repaying the amount borrowed plus interest. The advantages of using credit include enabling the purchase of valuable assets and helping with emergency expenses, while the disadvantages are that goods cost more and heavy credit use can lead to overextension and less money left for other expenses. Sources of credit include banks, credit unions, consumer finance companies, and utilities/medical providers who extend service credit. Interest is the price paid for using someone else's money, while collateral backs loans and can be repossessed if the loan is not repaid.

Uploaded by

JULIA BALICE
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Exercise 11.

1
What is Credit?
Answers

a. Why use credit? (Credit allows people to obtain the use of money that they do not
have. In return, people who use credit repay the amount they borrow, plus interest.)
b. What are the advantages to using credit? (Credit can help people in many ways—by
enabling them to acquire valuable assets, or by helping out with emergency
expenses.)
c. What are the disadvantages of using credit? (Goods and services can cost more when
purchased on credit. When people buy things on credit, the interest and fees they
must pay amount to a deduction from the money they might otherwise use to buy
things they currently want. Also, people sometimes borrow too much. That is, they use
too much credit in relation to their income. When people are overextended and
making heavy credit payments, they have less money left to pay for food,
transportation, clothing, and other bills. And finally, items bought on credit can be
repossessed by the lender if borrowers are unable to make the required payments.)
d. What institutions are sources of credit? (Commercial banks, savings and loans, credit
unions, and consumer finance companies. Utilities and medical providers extend
service credit.)
e. What is interest? (From a borrower’s point of view, interest is the price paid for using
someone else’s money.)
f. Who most often wins in a credit transaction? (Ordinarily, both parties expect to benefit
from a credit transaction.)
g. How does risk influence the rate of interest? (As risk goes up, interest rates usually go
up too. Higher-risk loans usually result in higher interest rates Lower-risk loans result
in lower interest rates.)
h. What is an unsecured loan? (An unsecured loan is one that doesn’t require collateral. It
is granted based solely on the borrower’s creditworthiness.)
i. What is collateral? (Collateral is an asset used to back a loan. For example, a car loan
is backed by the car that is being purchased. If you fail to repay your loan, the lender
can repossess the car and sell it to pay off the loan. If there is still a balance owed
after the sale of the collateral, the borrower will be expected to pay off this remaining
balance.)

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