Question 1

Payday lenders

Accepted Answer

Payday lenders make money both by providing one-time assistance during a time of financial need and by keeping borrowers in debt. They often encourage repeat borrowing by charging high interest rates and fees, making it difficult for borrowers to fully pay off their loans. Therefore, all of the above options are correct.

Question 2

The simple interest method is the most common method of calculating payments on an installment loan.

Accepted Answer

The simple interest method is indeed the most common method used to calculate payments on an installment loan. This method calculates interest as a percentage of the principal balance, which is then added to the amount due each period.

Question 3

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, allocates a greater proportion of each loan payment towards interest in the early stages of the loan and more towards principal later on. This is because the interest is calculated based on the original loan balance, which is higher at the beginning of the loan term, and decreases as the principal balance decreases over time. This calculation method is commonly used for installment loans, such as auto loans or personal loans.

Question 4

Fred ran short on cash and borrowed $300 through a Payday Loan company.The company charged him a fee of $60 to borrow the $300 for 14 days.Using the simple interest method calculate what interest rate was Fred charged for the aforementioned loan.

Accepted Answer

The interest rate for the loan can be calculated using the formula for simple interest: $ \text{Interest Rate} = \frac{\text{Interest}}{\text{Principal}} \times \frac{365}{\text{Loan Period}} \times 100 $. Here, the interest is $60, the principal is $300, and the loan period is 14 days. Plugging these values in gives $ \text{Interest Rate} = \frac{60}{300} \times \frac{365}{14} \times 100 = 0.2 \times 26.0714 \times 100 = 521.29\% $.

Question 5

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 often target less experienced borrowers who may not have a lot of income, such as college students and military personnel. These individuals may be more likely to need quick access to cash and less likely to have established credit or access to traditional loans. The lack of payday loan companies in newer neighborhoods may be due to the fact that the residents of these areas may have higher incomes and better credit, and therefore less of a need for payday loans.

Question 6

A payday loan is a reasonable option if you need a luxury item like a big screen TV.

Accepted Answer

A payday loan should not be used to purchase luxury items like a big screen TV. It is intended to provide short-term financial relief for unexpected emergencies or essential expenses. Using a payday loan for non-essential purchases can lead to a debt cycle and financial difficulties in the long run.

Question 7

Payday loans are a dangerous way to borrow money,and charge an annual interest rate of almost 400%.

Accepted Answer

Payday loans are a dangerous way to borrow money as they typically charge an annual interest rate of almost 400%, which can trap people in a cycle of debt.

Question 8

Amortization refers to the process in which a large proportion of the early payments of an installment loan goes to cover interest,and the later payments have a larger proportion going towards the payment of principal.

Accepted Answer

This is the definition of amortization.

Question 9

Loans using the add-on method are a relative bargain,and should be sought out.

Accepted Answer

Loans using the add-on method are not a bargain but are actually more expensive than other methods such as the simple interest method. It is important to avoid taking out loans using the add-on method.

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 actual interest rate is calculated by considering the $80 fee on a $400 loan for 10 days. To annualize this rate, we consider how many 10-day periods are in a year (365/10 = 36.5) and multiply the fee by this to scale to a yearly rate. The interest for a year would be $80 * 36.5 = $2920 on a $400 loan, which is 730% annually.

Question 11

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 12

With a discount method single-payment loan,the entire interest charge is subtracted from the principal before you receive the money,and at maturity you repay the principal.

Accepted Answer

In a discount method single-payment loan, the interest charge is subtracted from the principal upfront, so you receive the principal minus the interest. At maturity, you repay the principal, but no further interest accrues.

Question 13

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 14

The APR is larger when money is lent under the discount method than when it is lent under the simple interest method.

Accepted Answer

The discount method is a method of calculating the interest rate on a loan where the interest is deducted upfront from the amount lent. This means that the borrower receives less money than the face value of the loan, and the APR (annual percentage rate) is therefore higher. In contrast, the simple interest method adds interest to the principal in regular intervals, which results in a lower APR.

Question 15

Ronald is borrowing $20,000 using the discount method.His bank is offering him an annual percentage rate of 8.5% and he is taking out the loan for 24 months.How large of a check will Ronald receive from this loan when he leaves the bank? How much will he repay?

Accepted Answer

Using the discount method, the formula for the amount of money received by the borrower (P) is:

P = D/(1 - rT)

Where D is the amount of money borrowed, r is the annual percentage rate as a decimal, and T is the time in years.

Plugging in the given values, we get:

P = 20,000/(1 - 0.085*2)
P = 16,600

So Ronald will receive a check for $16,600 when he leaves the bank.

To find out how much he will repay, we need to use the formula for the interest that is charged:

I = DrT

Where I is the interest charged, D is the amount of money borrowed, r is the annual percentage rate as a decimal, and T is the time in years.

Plugging in the given values, we get:

I = 20,000*0.085*2
I = 3,400

So Ronald will repay a total of $20,000 + $3,400 = $23,400.

Therefore, the correct answer is B.

Question 16

The finance charges for a loan may include

Accepted Answer

Finance charges for a loan may include fees for a credit check, required insurance fees, and interest payments. Therefore, the best choice is E, all of the above choices.

Question 17

The annual percentage rate is the simple percentage cost of all finance charges over the life of the loan on an annual basis.

Accepted Answer

The statement accurately describes the annual percentage rate (APR). It takes into account all finance charges such as interest, fees, and other costs associated with a loan and expresses it as a yearly percentage.

Question 18

Which of the following is not required by law to be on a loan disclosure statement?

Accepted Answer

All of the options listed (A-D) are required by law to be on a loan disclosure statement.

Question 19

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 20

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 monthly payment for the loan, we need to use the formula:

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

Where, 
P = loan balance = $18,000
r = monthly interest rate = 8% / 12 = 0.00667
n = number of payments = 10 years * 12 months = 120

Plugging in these values in the formula, we get:

monthly payment = ($18,000 * 0.00667) / (1 - (1+0.00667)^(-120)) = $218.39

Therefore, the monthly payment will be $218.39, which is closest to answer choice C.

Quiz 7: Student and Consumer Loans: the Role of Planned Borrowing