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 singlepayment 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.

Crystal and Hilary 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.

Crystal

Crystal wanted to rent a share in a ski house for the upcoming winter, a six-month season. The house owner would not allow Crystal to pay the rent in six equal payments over the course of the ski season and, instead, required full payment up front. Crystal 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, Crystal 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.

Crystal most likely took out loan because she .

Hilary

Hilary took out a loan to buy new furniture. She has a steady job and a small savings account but didnt want to pay cash for the furniture. Hilary manages her finances so that her monthly income and expenses are consistent. She doesnt expect any financial windfalls in the near or distant future.

Hilary most likely took out loan because .

Maria and Rajiv 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.

Maria

Maria took out a ten-year loan. She paid $368 every month for 120 months, until the loan was paid off.

Maria most likely took out a loan because the monthly payment and number of payments .

Rajiv

Rajiv needed a long-term loan, somewhere between 15 and 30 years. He learned that the longer the term, the fewer rate options he had. Rajiv finally had to go with the 30-year loan.

Rajiv most likely took out a loan because .

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