Deck 7: Using Consumer Loans

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Ideally, you should take inventory of the consumer debt you have outstanding once a year.

Answer 3

False

Question 4

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

Question 5

Loans obtained by life insurance policyholders from their insurance companies are to be repaid on the date established by the loan documents.

Question 6

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

Question 7

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

Question 8

In most cases, lenders take the physical property used as collateral from the borrower and liquidate the collateral until the loan is repaid in a lump sum.

Question 9

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 10

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 11

Most consumer loans are made at fixed rates of interest.

Question 12

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

Question 13

The repayment of the principal of installment loans is made in a lump sum, and the repayment period of installment loans is 6 to 12 months.

Question 14

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

Question 15

The cash value of some types of life insurance policies can be used as collateral for loans.

Question 16

Only stocks can be used as collateral for personal loans.

Question 17

Rebates are often more cost-effective than the 0% annual percentage rate (APR) loans offered on automobile loans.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

A) Direct and Perkins
B) Direct and Parent Loans for Undergraduate Students (PLUS)
C) Perkins and Parent Loans for Undergraduate Students (PLUS)
D) Only Direct
E) Only Perkins

Question 22

The most common use of consumer loans is to finance:

A) a new car.
B) college education.
C) a vacation.
D) a house.
E) furniture.

Question 23

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 24

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) collateral
C) debt
D) insurance
E) corporate deposit

Question 25

The _____ uses a special tax-sheltered savings and investment program rather than borrowing money to pay for college.

A) 529 college savings plan
B) Wage Earner Plan
C) Perkins loan
D) Parent Loan for Undergraduate Students (PLUS)
E) William D. Ford Federal Direct Loan Program

Question 26

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
E) low-rate

Question 27

Which of the following statements regarding loan collateral is true?

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 28

A(n) _____ loan 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 29

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 (S&Ls)
E) Asset management companies

Question 30

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) a collateral note.
B) interim financing.
C) cumulative borrowing.
D) a loan rollover.
E) a loan extension.

Question 31

Which of the following statements regarding a consumer loan is true?

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 mainly to borrow money to pay for big-ticket items.

Question 32

Credit unions lend money to qualified people who are their:

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

Question 33

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 (S&L)
E) A savings bank

Question 34

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

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

Question 35

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

A) 30 days
B) 60 days
C) 90 days
D) 120 days
E) 180 days

Question 36

Consumer finance companies:

A) charge rates that are regulated by the states where they do business.
B) are cooperative financial institutions that are owned by their members.
C) are nonprofit financial institutions.
D) accept deposits from their members and use the deposits for lending.
E) are managed by large manufacturing companies.

Question 37

A _____ loan is intended to help consumers who have an unhealthy credit situation caused by overusing their credit.

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

Question 38

_____ obtain funds from their stockholders and through open market borrowing.

A) Credit unions
B) Consumer finance companies
C) Commercial banks
D) Life insurance companies
E) Savings and loan associations (S&Ls)

Question 39

Most loans made by savings and loan associations (S&Ls) are:

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

Question 40

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

A) Fixed-rate loans are preferable if 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 if interest rates are expected to fall.
E) Fixed-rate loans have periodic adjustment dates, at which time the interest rate and monthly payment are adjusted as necessary.

Question 41

Which of the following statements regarding single-payment loans is true?

A) They are generally unsecured and do not have any collateral.
B) They usually mature in 1 year or less.
C) They are usually provided by retailers.
D) They are generally used to finance auto purchases.
E) They are provided by sales finance companies.

Question 42

Most single-payment loans are secured by:

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

Question 43

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 44

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.
E) 3-month repayment plan.

Question 45

Which of the following statements regarding loan maturity is true?

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 46

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

A) educational qualifications
B) history of auto ownership
C) past employment
D) financial plans
E) career plans

Question 47

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 48

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 49

Borrowing from _____ is not advisable.

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

Question 50

A loan against the cash value of your life insurance policy would be characterized by:

A) increased death benefits to beneficiaries.
B) increased premiums.
C) no specific repayment date.
D) annual percentage rates (APRs) higher than other sources.
E) a fixed interest rate.

Question 51

If a loan has a prepayment penalty, there will be an additional cost to repay the loan early:

A) if the loan is repaid before the first payment is due.
B) if the lender wants to recover part of the full interest that would have been earned.
C) if the borrower has defaulted on any monthly payment.
D) if the loan is not repaid before the loan maturity date.
E) if the loan is prepaid 3 months before the loan maturity.

Question 52

Which of the following statements regarding consumer finance companies is true?

A) Consumer finance companies accept deposits and give small loans to their members.
B) Consumer finance companies make loans of any size 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 loans to qualified individuals.

Question 53

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 54

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 55

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.
E) the longer maturity will have the higher monthly payment and the lower total costs.

Question 56

Which of the following statements regarding credit unions is true?

A) They make secured loans only to nonmembers.
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 for-profit organizations.

Question 57

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 58

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 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 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 61

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 62

The _____ is commonly used on revolving credit lines by commercial banks, savings and loan associations (S&Ls), and credit unions.

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

Question 63

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) paid to the borrower is $2,400.
C) repaid is $2,650.60.
D) paid to the borrower is $2,650.60.
E) repaid is $2,149.40.

Question 64

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The recent average annual cost of a college education at a private college is [ under $47,000 | over $51,000 ].

Question 65

Jamil is purchasing a new truck for $30,000. He is making a $2,000 down payment and will be making 60 monthly payments of $541 each. What are the total finance charges on this loan? (Show all work.)

Question 66

Which of the following is the monthly payment on an 8%, 36-month, add-on loan of $10,000? (Round the answer to the nearest dollar.)

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

Question 67

Purchasing credit life or disability insurance is:

A) usually required as a condition for obtaining a loan.
B) a good idea for the borrower.
C) very costly.
D) recommended for borrowers over the age of 40.
E) not advantageous for lenders.

Question 68

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Consolidation loans are generally [ inexpensive | expensive ].

Question 69

Jamie is going to buy furniture with a single-payment loan that is discounted. The loan will be for $5,000 for 2 years at 10% interest. Calculate the annual percentage rate (APR) on this loan. (Show all work.)

Question 70

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The interest paid on a student loan [ is sometimes | is not ] tax deductible.

Question 71

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The average student debt is about [ $35,000 | $75,000 ].

Question 72

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

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

Question 73

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The majority of consumer loans are made with [ fixed | variable ] interest rates.

Question 74

Calculating interest using the _____ will result in the highest annual percentage rate (APR) on a single-payment loan.

A) double-declining-balance method
B) discount method
C) average loan balance method
D) simple interest method
E) add-on method

Question 75

Calculate the finance charge and the monthly payment on a $20,000 add-on installment loan with an interest rate of 9% and a term of 5 years. (Show all work.)

Question 76

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Students borrowing to pay for college should base the amount borrowed on [ current income | expected future salary ].

Question 77

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) paid to the borrower is $2,049.20.
C) repaid is $2,350.80.
D) paid to the borrower is $2,350.80.
E) paid to the borrower is $150.80.

Question 78

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

A) annual percentage rate (APR)
B) balance due
C) prepayment penalty
D) basic cost of money
E) amount saved

Question 79

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 usually 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 80

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) repaid is $1,900.80.
B) paid to the borrower is $1,699.20.
C) repaid is $1,699.20.
D) repaid to the borrower is $1,800.
E) paid to the borrower is $100.80.