Question 1

A simple interest installment loan calculates interest on the unpaid balance. An add-on

Accepted Answer

An add-on interest loan calculates interest on the original loan amount at the beginning and adds it to the total loan amount, which generally makes it more costly than a simple interest loan that calculates interest on the remaining balance.

Question 2

A rule to determine what proportion of each loan payment is principal and interest is

Accepted Answer

The rule of 78, also known as the sum of digits method, is used to determine the proportion of principal and interest in each loan payment. It applies a greater proportion of interest to earlier payments and more principal to later payments. This method is often used for short-term loans or loans with fixed payment schedules.

Question 3

You have just obtained a personal loan for a new home movie system under the simple interest method. You have borrowed $12,000 for 9 months at an annual rate of 10%. Your marginal tax rate is 28%. What are the total interest charges you would pay if the loan is paid off on time?

Accepted Answer

The total interest charges can be calculated using the simple interest formula: Interest = Principal x Rate x Time. Here, Interest = $12,000 x 0.10 x (9/12) = $900.

Question 4

In driving around town one day, you noticed most of the payday loan companies were located close to the college and the local military base and there were none out in the newer neighborhoods. Why do you think this is so?

Accepted Answer

Payday lenders tend to target individuals who are less experienced with financial matters, and may not have a lot of money or access to traditional credit sources. College students and military personnel are often in this category, making them prime targets for payday lenders. The absence of payday lenders in newer neighborhoods may be due to factors such as lower demand or stricter zoning laws.

Question 5

A loan that is paid back in a single lump sum payment at the due date of the loan is commonly called a(n)

Accepted Answer

A loan that is paid back in a single lump sum payment at the due date of the loan is commonly called a balloon loan.

Question 6

You are headed to the mountains for some climbing this summer and you need some gear. The local mountaineering shop is offering 6% financing on all purchases before the end of the month. Your savings account is currently paying 5%, and you are in a marginal tax bracket of 28%. Which of the following is true?

Accepted Answer

It is cheaper to take the money out of savings as the interest rate on the savings account is 5%, which is lower than the mountaineering shop's financing rate of 6%. Additionally, borrowing from the shop would result in accruing interest on the loan, which would cost more in the long run. The marginal tax bracket is not relevant here as it does not impact the cost of borrowing or interest earned on savings.

Question 7

The ________ is the true simple interest rate paid over the life of a loan and provides a reasonable approximation for the true cost of borrowing.

Accepted Answer

The APR (Annual Percentage Rate) represents the true simple interest rate paid over the life of a loan and includes all fees and charges associated with the loan. It provides a reasonable approximation for the true cost of borrowing. The other options are not related to the true cost of borrowing.

Question 8

Which is better, a fixed-rate loan or a variable-rate loan?

Accepted Answer

The choice between fixed-rate and variable-rate loans depends on individual risk tolerance and market conditions. Fixed-rate loans offer stability, while variable-rate loans may offer lower initial rates but come with the risk of rate increases.

Question 9

Calculate the interest on $6,000 borrowed at an annual rate of 9% under the simple interest loan method for 9 months.

Accepted Answer

First, we need to calculate the monthly interest rate: 
9% annual rate = 0.09/12 = 0.0075 monthly rate

Next, we can use the formula for simple interest: 
Interest = Principal x Rate x Time

Time = 9 months 
Principal = $6,000 
Rate = 0.0075

Interest = $6,000 x 0.0075 x 9 = $405

Therefore, the answer is Choice C.

Question 10

Steven is beginning a new job but has not yet been paid. He needs $400 to pay his rent this month. Steven is going to borrow the money through a Payday Loan establishment. They are charging him an $80 fee to borrow the money for 10 days until he receives his first paycheck. What is the actual interest rate that Steven is being charged?

Accepted Answer

The total cost Steven is paying to borrow $400 is $480 ($400 loan + $80 fee). To calculate the interest rate, we need to determine how much interest Steven is paying for a 10-day loan. 
Using the formula: interest = (total cost / loan amount) * (365 / number of days loan is taken)
interest = ($480 / $400) * (365 / 10) = 438%
Therefore, Steven is being charged an actual interest rate of 730%.

Question 11

Give five things you can do to obtain the most favorable rates on loans, which in essence will allow you to lower the lender's risk.

Accepted Answer

The answer of Give five things you can do to...

Question 12

Your brother, a banker, has just approved a loan for you, an add-on interest loan. You will borrow $2,000 for one year with a 12% annual interest rate. What is your monthly payment?

Accepted Answer

To calculate the monthly payment for an add-on interest loan, you first need to calculate the total amount of interest you will pay over the term of the loan. For this loan, the interest is 12% of $2,000, which is $240.

Next, add the interest to the original loan amount to get the total amount you will repay: 
$2,000 + $240 = $2,240

Finally, divide the total amount by the number of payments you will make to find the monthly payment. For this loan, you will make 12 payments (one each month for a year), so: 
$2,240 ÷ 12 = $186.67

Therefore, the answer is B: $186.67.

Question 13

What is the name of the interest rate banks charge to their most creditworthy customers?

Accepted Answer

The interest rate banks charge to their most creditworthy customers is called the prime rate. This is the rate that banks use as a base for calculating interest rates for their other customers, such as small business owners and individual borrowers. It is typically lower than the rates offered to less creditworthy borrowers.

Question 14

What strategy should you use to obtain the lowest possible APR on a loan?

Accepted Answer

Strategies to obtain the lowest possible Annual Percentage Rate (APR) on a loan include getting a variable-rate loan (which can offer lower initial rates), keeping the loan term short (reducing the lender's risk), making a large down payment (decreasing the loan amount and the lender's risk), and providing collateral (securing the loan, thus lowering the interest rate). All these actions can influence the lender to offer a lower APR.

Question 15

Gary is taking out a $5,000 loan for 1 year at an APR of 12%. His bank has offered him a loan using the add-on method. Using first the financial calculator method and the add-on method calculate Gary's monthly loan payment.

Accepted Answer

The financial calculator method gives a monthly payment of $444.24, while the add-on method gives a monthly payment of $466.67. Therefore, the best choice is A, as it has the lower monthly payment. Additionally, the add-on method should generally be avoided, as it results in higher overall interest costs compared to other methods such as the financial calculator method.

Question 16

Veronica was offered a loan using the discount method of calculation by her bank. She will borrow $10,000 for one year at an APR of 11%. How large will the check be that Veronica receives? How much must she repay?

Accepted Answer

The answer of Veronica was offered a loan using the...

Question 17

You just bought a car and borrowed $15,000 for 5 years at 8% APR. Using the simple interest method; by the time you pay off this loan your total finance costs will be closest to which of the following?

Accepted Answer

Using the simple interest method, the total finance cost can be calculated as:

Total finance cost = Principal x (interest rate/100) x time

= $15,000 x (8/100) x 5

= $6,000

However, this calculation assumes that the interest is compounded annually, which is not the case with simple interest.

With simple interest, the interest is only calculated on the principal amount and not on the accumulated interest. Therefore, the actual total finance cost will be lower than $6,000.

To calculate the actual total finance cost, we can use the formula:

Total finance cost = Principal x (interest rate/100) x time + Principal

= $15,000 x (8/100) x 5 + $15,000

= $3,000 + $15,000

= $18,000

So, the closest answer is B) $3,249, which is less than the actual finance cost of $18,000.

Question 18

Congratulations! You have just graduated from college and are determining what your monthly student loan payments will be. After consolidating all of your loans, you have a balance of $18,000. At 8% APR for 10 years, what will your monthly payments be?

Accepted Answer

To calculate the monthly payment, we can use the formula for loan payments:

P = (r * A) / (1 - (1+r)^-n)

Where P is the monthly payment, r is the monthly interest rate (APR divided by 12), A is the loan balance, and n is the number of payments (in this case, 10 years * 12 months = 120 payments).

Substituting in our values:

P = (0.08/12 * 18000) / (1 - (1+0.08/12)^-120) = $218.39

So the monthly payments will be $218.39 per month.

Question 19

You just received a loan from your banker to buy seed and plant your alfalfa field. The loan is a discount loan and is for $5,000 for 1 year and the quoted rate was 10%. What is your APR?

Accepted Answer

A discount loan is one where the interest is deducted from the principal upfront and the borrower receives the net amount. In this case, the borrower receives $5,000 and pays back $5,500 at the end of the year. 
To calculate the APR, we need to find the interest rate that would make the present value of the loan equal to $5,000. 
$5,000 = $5,500/(1 + r) 
Solving for r, we get r = 0.1111 or 11.11%.

Question 20

Explain why add-on installment loans are more expensive than simple interest loans.

Accepted Answer

The answer of Explain why add-on installment loans are more...

Quiz 7: Using Consumer Loans: The Role of Planned Borrowing