Question 1

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

Accepted Answer

Rebates are a direct reduction in the purchase price of the vehicle, while 0% APR loans simply spread the cost of the vehicle over a longer period of time. This means that rebates are more cost-effective because they reduce the amount of money you owe on the vehicle, while 0% APR loans only reduce the amount of interest you pay.

Question 2

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

Accepted Answer

A home equity loan provides a lump sum that you repay in fixed installments, whereas a home equity line of credit (HELOC) allows you to borrow, repay, and reborrow up to your credit limit, similar to a credit card.

Question 3

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

Accepted Answer

The add-on method tends to be more expensive than the simple interest method because interest is calculated on the original principal for the entire loan period, without considering the gradually decreasing principal balance.

Question 4

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

Accepted Answer

This statement is true. According to a report by the Federal Reserve Bank of New York, the share of longer-term installment loans with variable interest rates has been steadily increasing over the past few years.

Question 5

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

Accepted Answer

The debt safety ratio, often referred to as the debt service coverage ratio (DSCR) in finance, measures an individual's or entity's ability to cover debt payments with their cash flow, not the total assets owned.

Question 6

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

Accepted Answer

Fixed-rate loans have a set interest rate for the entire duration of the loan, regardless of any changes in market interest rates. Therefore, if interest rates are expected to fall over the course of the loan, it would be beneficial to have a variable-rate loan so that the interest rate can adjust downwards with the market.

Question 7

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

Accepted Answer

The answer of Loans obtained by life insurance policyholders from...

Question 8

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

Accepted Answer

This statement is false. Home equity loans are actually secured with the borrower's home as collateral, whereas home equity lines of credit may or may not be secured with collateral.

Question 9

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

Accepted Answer

Parent Loans for Undergraduate Students (PLUS) are made to the parents or legal guardians to help pay for their child's education, and not to the students directly.

Question 10

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.

Accepted Answer

The repayment of the principal of installment loans is made in a series of fixed payments over the repayment period, which can range from a few months to several years.

Question 11

Most consumer loans are made at fixed rates of interest.

Accepted Answer

Most consumer loans, such as auto loans and mortgages, have a fixed interest rate which does not change over the life of the loan. This is different from variable rate loans, which have an interest rate that fluctuates based on market conditions.

Question 12

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

Accepted Answer

Some types of life insurance policies, such as whole life and universal life, have a cash value component that can be borrowed against as collateral for loans. However, it is important to note that borrowing against the cash value may reduce the death benefit and may come with additional fees and interest charges.

Question 13

Only stocks can be used as collateral for personal loans.

Accepted Answer

While stocks can be used as collateral for personal loans, other assets such as real estate, cars, and jewelry can also be used.

Question 14

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.

Accepted Answer

Lenders typically place a lien on the collateral but do not take physical possession of it; they may liquidate the collateral only if the borrower defaults on the loan.

Question 15

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

Accepted Answer

A debt safety ratio of 10% indicates a low reliance on credit, suggesting that only 10% of your income is going towards debt repayment, which is generally considered manageable and not too heavy.

Question 16

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.

Accepted Answer

When the interest rate on savings is lower than the interest rate on a loan, it means that borrowing money is more expensive than using your savings. In this case, it is less expensive to use your savings to make a purchase than to borrow money at a higher interest rate.

Question 17

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

Accepted Answer

A chattel mortgage is a type of loan agreement where a lender finances the purchase of movable personal property, such as equipment or vehicles. As collateral for the loan, the borrower gives the lender a security interest over the property, which means that the lender has the right to repossess and sell the property in the event of default. This gives the lender title to the property until the loan is paid off.

Question 18

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

Accepted Answer

The size of monthly payments when taking a loan is crucial for financial planning. It affects your overall budget and cash flow. It is important to factor in monthly payments when deciding on taking a loan to ensure that it fits within your budget and does not cause financial strain.

Question 19

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

Accepted Answer

It is legal for a lender to charge a prepayment penalty, although not all loans have this type of fee. This penalty is typically a percentage of the remaining balance of the loan and is charged if the borrower pays off the loan early or makes a larger payment than what was agreed upon in the loan contract.

Question 20

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

Accepted Answer

The answer of Consumer loans, like open account credits, result...

Quiz 7: Using Consumer Loans