Chuck Spencer wants to borrow money for three years to purchase a new car. He has been offered a seven percent fixed rate loan and also a variable rate loan that has an initial rate of five percent. By choosing the variable rate loan, Chuck is reducing the lender's risk by:
A) sharing the interest rate risk.
B) increasing his monthly payments.
C) taking a larger stake in the asset he is purchasing.
D) repaying the loan over a faster period of time.
E) pledging collateral.

Question

Quizplus · Accepted Answer

By choosing the variable rate loan, Chuck is sharing the interest rate risk with the lender. If interest rates rise, Chuck's monthly payments will increase, but if they go down, his payments will decrease. This reduces the lender's risk because they are not solely responsible for absorbing interest rate fluctuations.

Chuck Spencer Wants to Borrow Money for Three Years to Purchase