Deck 7: Using Consumer Loans

Question 1

Home equity loans are similar to home equity credit lines as they are also not secured with any collateral.

Answer 1

False

Question 2

Most consumer loans are made at fixed rates of interest-that is,the interest rate charged and the monthly payments remain the same over the life of the obligation.

Answer 2

True

Question 3

A chattel mortgage is an instrument that gives lenders title to a property in the event of default.

Answer 3

True

Question 4

If your debt safety ratio works out to 10%,you are relying too heavily on credit.

Question 5

The debt safety ratio indicates the total assets owned by an individual.

Question 6

The frequency of longer-term installment loans carrying variable interest rates is increasing.

Question 7

The repayment of the principal of installment loans is made in a lump sum,and the repayment period of installment loans is six to twelve months.

Question 8

If the proceeds from the sale of your repossessed collateral are insufficient to pay off the balance due on your loan,the lender can usually collect the remaining amount from you.

Question 9

Rebates are always more cost effective than the 0 percent annual percentage rate (APR)loans offered on automobile loans.

Question 10

It is legal for a lender to charge a prepayment penalty.

Question 11

The cash value of a wholelife insurance policy can be used as a source of loan collateral.

Question 12

Consumer loans,like open account credits,result from a rather informal process.

Question 13

When loaning money to a friend or family member,it is advisable to lend only an amount that you can afford to give away.

Question 14

Only stocks can be used as collateral for personal loans.

Question 15

Fixed-rate loans are desirable if interest rates are expected to fall over the course of the loan.

Question 16

The add-on method is less expensive than the simple interest method when the stated rates of interest are identical.

Question 17

Parent Loans for Undergraduate Students (PLUS)loans are made to the parents or legal guardians rather than to the students.

Question 18

From a financial planning perspective,you need not worry about the size of monthly payments while taking a loan.

Question 19

Loans obtained by life insurance policyholders from their insurance companies are to be repaid on the repayment dates.

Question 20

In most cases,lenders liquidate the collateral until the loan is repaid in a lump sum.

Question 21

When the interest rate on savings is lower than the interest rate on a loan,it is less expensive to use your savings to make a purchase.

Question 22

You can borrow,repay,and reborrow from a home equity loan in the same way as you can from a home equity credit line.

Question 23

Which of the following is true of loan collateral?

A)Loans secured by collateral always have higher finance charges than unsecured loans.
B)Collateral is an item of value used to secure the principal portion of a loan.
C)Collateral is always required by banks to lend to customers with good credit ratings.
D)Collateral is an item of value used to secure the interest portion of a loan.
E)Loans are secured by collateral that is readily marketable at a price high enough to cover the interest portion of the loan.

Question 24

Which of the following is a nondepository institution?

A)A commercial bank
B)A credit union
C)A consumer finance company
D)A savings and loan association
E)A savings bank

Question 25

Consumers whose debt burden has become very heavy might apply for:

A)a personal loan.
B)a single-payment loan.
C)a buy-down loan.
D)a consolidation loan.
E)a standard loan.

Question 26

Which of the following is true of a consumer loan?

A)A consumer loan is used chiefly to make repeated purchases of relatively low-cost goods and services.
B)A consumer loan results from a rather informal process and involves no negotiated contracts.
C)A consumer loan provides credit cards and checks to the consumers.
D)A consumer loan provides revolving credit to the consumers.
E)A consumer loan is used to finance the purchase of goods that are far too expensive.

Question 27

To qualify for a subsidized Stafford loan,you must:

A)own a few financial assets to repay the loan.
B)make satisfactory academic progress.
C)have parents who are graduates.
D)have parents who are capable of repaying the loan.
E)be in default on any other student loans.

Question 28

Which of the following is true of fixed-rate loans?

A)Fixed-rate loans are preferable when interest rates are expected to rise.
B)The cost of fixed-rate loans increases with an increase in the market interest rate.
C)The cost of fixed-rate loans decreases with a decrease in the market interest rate.
D)Fixed-rate loans are preferable when interest rates are expected to fall.
E)The interest rates on fixed-rate-loans have periodic adjustment dates,at which time monthly payments are adjusted.

Question 29

Sales finance companies:

A)buy installment loans from consumers.
B)buy installment loans from retailers.
C)sell installment loans to retailers.
D)buy installment loans from banks.
E)sell installment loans to banks.

Question 30

Mason Corporation borrows funds for the expansion of its business.The loan is secured with the office building.Therefore,the office building serves as _____ for the loan.

A)a liability
B)a collateral
C)a debt
D)an insurance
E)a corporate deposit

Question 31

A single-payment loan used to finance a purchase when the cash to be used for repayment is known to be forthcoming in the near future is a form of _____.

A)collateral security
B)interim financing
C)cumulative borrowing
D)loan rollover
E)loan extension

Question 32

Commercial banks are able to charge lower interest rates than other lending institutions because:

A)they make shorter term loans.
B)they usually take only the best credit risks.
C)their depositors require higher rates.
D)they get their funds from the money market.
E)they make only secured loans.

Question 33

Most loans made by savings and loan associations are:

A)home improvement loans.
B)auto loans.
C)mortgage loans.
D)education loans.
E)consolidation loans.

Question 34

Consumer finance companies:

A)offer the highest interest rate on installment loans.
B)are cooperative financial institutions that are owned by its members.
C)are non-profit financial institutions.
D)accept deposits from their members and use the deposits for lending.
E)are managed by large manufacturing companies.

Question 35

The most popular use of consumer loans is to:

A)purchase a car.
B)finance college education.
C)finance a vacation.
D)buy a house.
E)buy furniture.

Question 36

_____ loans do not have to be repaid until after you graduate from college.

A)Stafford and Perkins
B)Stafford and Parent Loans for Undergraduate Students (PLUS)
C)Perkins and Parent Loans for Undergraduate Students (PLUS)
D)Arthurs and Sallie Mae
E)Perkins and Arthurs

Question 37

Credit unions lend money to qualified people who are their:

A)employees.
B)members.
C)suppliers.
D)policyholders.
E)stockholders.

Question 38

A(n)_____ loan is a loan that is repaid in a series of fixed,scheduled payments rather than in a lump sum.

A)interim
B)single-payment
C)installment
D)standard
E)consolidated

Question 39

Which of the following sources of consumer loans often has the most favorable terms for borrowers?

A)Commercial banks
B)Credit unions
C)Consumer finance companies
D)Savings and loan associations
E)Asset management companies

Question 40

When the interest rate on savings is higher than the interest rate on a loan,it is less expensive to borrow to make a purchase.

Question 41

Which of the following is true of installment loans?

A)Installment loans require the principal to be repaid in a single payment.
B)Installment loans,like home equity loans,offer the benefit of tax deductibility on the interest paid on them.
C)Installment loans are secured using only second mortgages.
D)Installment loans are issued only by the federal government.
E)Installment loans are revolving credit lines from which consumers can borrow,repay,and reborrow.

Question 42

Which of the following is recommended if you loan money to a friend or relative?

A)Charge interest at a rate comparable to any high-risk security.
B)Always consider offering cash as a gift instead of extending a loan.
C)Put the agreement in writing.
D)Ensure that the loan is due within one year or less.
E)Make informal transactions for friends and relatives.

Question 43

A single-payment loan:

A)is generally unsecured and does not have any collateral.
B)usually matures in one year or less.
C)is usually provided by retailers.
D)is generally used to finance auto purchases.
E)is provided by sales finance companies.

Question 44

Which of the following is true of loan maturity?

A)The longer the loan maturity,the higher the amount of interest paid.
B)The shorter the loan maturity,the higher the total cost of borrowing.
C)The longer the loan maturity,the higher the monthly payments.
D)The shorter the loan maturity,the lower the monthly payments.
E)The longer the loan maturity,the lower the total cost of borrowing.

Question 45

When the simple interest method is used to determine finance charges,the interest is calculated based on the:

A)future value of the installments.
B)average outstanding balance.
C)actual balance of the loan.
D)present value of all finance charges.
E)future value of all finance charges.

Question 46

Which of the following is a feature of a home equity loan?

A)The interest rate on a home equity loan is higher than that on other loans.
B)The interest paid on a home equity loan is tax deductible.
C)A home equity loan is generally the first mortgage loan.
D)A home equity loan is a single-payment loan.
E)A home equity loan is an unsecured loan.

Question 47

Which of the following statements is true of credit unions?

A)They make secured loans only to non-members.
B)They are owned and managed by the government.
C)They provide installment loans to their members.
D)They charge higher interest rates than other sources of consumer loans.
E)They are profit-making organizations.

Question 48

You want to borrow $1,000 at an interest rate of 10%.The most expensive method of calculating the dollar cost of the interest on the installment loan will be the:

A)add-on method.
B)double declining balance method.
C)discount method.
D)simple interest method.
E)past-due balance method.

Question 49

Which of the following is true of loan maturity?

A)The longer the loan maturity,the higher the monthly payments.
B)The shorter the loan maturity,the higher the total finance cost.
C)The shorter the loan maturity,the higher the monthly payments.
D)The longer the loan maturity,the lower the total finance cost.
E)The shorter the loan maturity,the higher the prepayment penalty.

Question 50

The annual percentage rate (APR)is equivalent to the stated rate of interest when the _____ is used to calculate finance charges.

A)dollar cost of credit method
B)discount method
C)average loan balance method
D)double declining balance method
E)simple interest method

Question 51

If you borrow money on a single-payment loan and discover that you cannot pay it back when it is due,you should:

A)purchase a credit card.
B)unsecure the loan.
C)pay a prepayment penalty.
D)negotiate a rollover.
E)file for bankruptcy.

Question 52

If Liza's debt safety ratio is 15% and her monthly take-home pay is $4,500,which of the following equals her total monthly payments?

A)$675
B)$1,200
C)$500
D)$450
E)$890

Question 53

A legal claim that allows creditors to liquidate loan collateral is a:

A)loan application.
B)note.
C)security claim.
D)lien.
E)loan rollover.

Question 54

The monthly payment on an 8%,36-month,add-on loan of $10,000 would be:

A)$278.
B)$300.
C)$314.
D)$344.
E)$380.

Question 55

The annual percentage rate (APR)on a single-payment loan of $1,000 at a simple interest rate of 12% is:

A)10%.
B)12%.
C)15%.
D)18%.
E)24%.

Question 56

Which of the following is true of consumer finance companies?

A)Consumer finance companies always charge lower rates of interest than commercial banks.
B)Consumer finance companies make large loans to low-risk borrowers.
C)Consumer finance companies offer consumer loans at the lowest interest rates.
D)Consumer finance companies offer consumer loans only for home mortgage lending.
E)Consumer finance companies make secured and unsecured (signature)loans to qualified individuals.

Question 57

Jenny's monthly take-home pay is $5,000,and her total monthly payments are $1,000.Which of the following is Jenny's debt safety ratio?

A)10%
B)5%
C)20%
D)35%
E)40%

Question 58

If a loan has a prepayment penalty,there will be:

A)no additional cost to repay the loan early.
B)an additional cost to repay the loan early.
C)an additional cost to repay the loan if the borrower has defaulted any monthly payment.
D)an additional cost to repay the loan if the loan is not repaid before the loan maturity.
E)no additional cost to repay the loan early only if the loan is prepaid 3 months before the loan maturity.

Question 59

A loan rollover means that:

A)the loan is paid off by taking out another loan.
B)the loan is repaid without any defaults in payments.
C)the interest on the new loan is lower than the previous loan.
D)the maturity period of the new loan is longer than the maturity period of the original loan.
E)the new loan will not have any processing fees.

Question 60

A single-payment loan is advantageous to a borrower only if:

A)the interest rate is more than that on an installment loan offered by commercial banks.
B)funds are expected to be available in the future to repay the loan in a lump sum.
C)the finance charges are calculated using the discount method.
D)the finance charges are calculated using the simple interest method.
E)it has a collateral note.

Question 61

You are borrowing $5,000 at a 9% interest rate.The total finance cost will be the highest in a ____________. ​

A)24-month repayment plan
B)36-month repayment plan
C)12-month repayment plan
D)48-month repayment plan

Question 62

You are borrowing $1,000 with an APR of 10% and a loan maturity of one year.Total interest charges will be the highest when ____________. ​

A)you pay off the loan in 12 monthly installments
B)you pay off the loan in 10 monthly installments
C)you make one payment in full at the end of the year
D)you prepay the loan 6 months prior to the maturity of the loan

Question 63

Calculating interest using the ____________ will result in the highest APR on a single-payment loan. ​

A)double declining balance method
B)discount method
C)average loan balance method
D)simple interest method

Question 64

The Rule of 78s is used to calculate the ____________ when an installment loan is paid off early. ​

A)APR
B)balance due
C)prepayment penalty
D)basic cost of money

Question 65

If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan,the amount to be ____________. ​

A)repaid is $2,400
B)disbursed to the borrower is $2,400
C)repaid is $2,650.60
D)disbursed to the borrower is $2,650.60

Question 66

A legal claim that allows lenders to liquidate loan collateral,in case the borrower defaults,is called a ____________. ​

A)loan contract
B)promissory note
C)lien
D)security claim

Question 67

Borrowing from ____________ is seldom recommended by financial advisors. ​

A)relatives
B)consumer finance companies
C)asset management companies
D)credit unions

Question 68

You are borrowing $5,000 at a 9% interest rate.The monthly payments will be the highest in a ____________. ​

A)24-month repayment plan
B)36-month repayment plan
C)12-month repayment plan
D)48-month repayment plan

Question 69

Loan repayment under the Parent Loans for Undergraduate Students (PLUS)program normally begins within ____________ of loan disbursement. ​

A)60 days
B)90 days
C)120 days
D)180 days

Question 70

____________ obtain funds from their stockholders and through open market borrowing. ​

A)Credit unions
B)Consumer finance companies
C)Commercial banks
D)Life insurance companies

Question 71

If the add-on method is used to calculate a finance charge of $150.80 on a $2,200 loan,the amount to be ____________. ​

A)repaid is $2,200
B)disbursed to the borrower is $2,049.20
C)repaid is $2,350.80
D)disbursed to the borrower is $2,350.80

Question 72

Using the ____________ would be least expensive for the borrower when determining the total amount to be paid to the lender. ​

A)simple interest method
B)add-on interest method
C)discount method
D)sum-of-the-digits method

Question 73

When comparing two installment loans with the same principal and annual percentage rate (APR),the loan with ____________. ​

A)the longer maturity will have the lower monthly payment and the higher total costs
B)the shorter maturity will have the lower monthly payment and the higher total costs
C)the longer maturity will have the higher monthly payment and the higher total costs
D)the shorter maturity will have the lower monthly payment and the lower total costs

Question 74

The ____________ on a student loan is (are)sometimes tax deductible. ​

A)total interest and the principal amount paid
B)interest paid
C)interest and the principal amount paid over the first 5 years
D)interest and the principal amount paid over the first 3 years

Question 75

It is better to use your savings instead of borrowing to make a purchase when:

A)the borrower has adequate savings.
B)interest rates are rising.
C)interest rates are falling.
D)the cost of borrowing is greater than the interest earned on savings.
E)the interest earned on savings is greater than the interest paid on the loan.

Question 76

You should consider your ____________ before you take on a large consumer loan. ​

A)educational qualification
B)history of auto ownership
C)past employment
D)budgeted expense

Question 77

The rate of interest charged on ____________ loans changes periodically in keeping with prevailing market conditions. ​

A)nominal-rate
B)standard-rate
C)variable-rate
D)fixed-rate

Question 78

If you don't have much down payment money,a ____________ can effectively act as the cheapest source of down payment. ​

A)rebate
B)percent APR loan
C)credit card
D)commercial loan

Question 79

If the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan,the amount to be ____________. ​

A)disbursed is $1,900.80
B)disbursed to the borrower is $1,800
C)repaid is $1,699.20
D)repaid to the borrower is $1,800

Question 80

Most single-payment loans are secured by ____________. ​

A)collateral
B)security claims
C)rollover loans
D)finance charges