PFIN Test 2 Chapter 7

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

False

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

False

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

False

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

False

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

False

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. a. True b. False

False

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

False

Only stocks can be used as collateral for personal loans. a. True b. False

False

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

False

The debt safety ratio indicates the total assets owned by an individual. a. True b. False

False

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. a. True b. False

False

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

False

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

True

It is legal for a lender to charge a prepayment penalty. a. True b. False

True

Most consumer loans are made at fixed rates of interest. a. True b. False

True

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

True

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

True

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

True

The frequency of longer-term installment loans carrying variable interest rates is increasing. a. True b. False

True

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. a. True b. False

True

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.

a

Borrowing from _____ is not advisable. a. relatives b. consumer finance companies c. asset management companies d. credit unions e. commercial banks

a

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 non-profit financial institutions. d. accept deposits from their members and use the deposits for lending. e. are managed by large manufacturing companies.

a

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

a

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. disbursed to the borrower is $2,400. c. repaid is $2,650.60. d. disbursed to the borrower is $2,650.60. e. repaid is $2,149.40.

a

If you don't have much down payment money, a _____ can effectively act as the cheapest source of down payment. a. rebate b. personal loan c. credit card d. commercial loan e. 0% APR

a

Most single-payment loans are secured by: a. collateral. b. security claims. c. rollover loans. d. finance charges. e. liens.

a

The most common use of consumer loans is to: a. purchase a car. b. finance college education. c. finance a vacation. d. buy a house. e. buy furniture.

a

Using the _____ would be least expensive for the borrower when determining the total amount to be paid to the lender. a. simple interest method b. add-on interest method c. discount method d. sum-of-the-digits method e. average loan balance method

a

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.

a

Which of the following statements regarding fixed-rate loans is true? a. Fixed-rate loans are preferable when 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 when interest rates are expected to fall. e. The interest rates on fixed-rate-loans have periodic adjustment dates, at which time monthly payments are adjusted.

a

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.

a

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.

a

_____ 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

a

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.

b

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. collateral note. b. interim financing. c. cumulative borrowing. d. loan rollover. e. loan extension.

b

Calculating interest using the _____ will result in the highest 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

b

Commercial banks are able to charge lower interest rates than other lending institutions because: a. they make shorter-term loans. b. they usually take only the best credit risks. c. their depositors require higher rates. d. they get their funds from the money market. e. they make only secured loans.

b

Credit unions lend money to qualified people who are their: a. employees. b. members. c. suppliers. d. policyholders. e. stockholders.

b

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.

b

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. disbursed is $1,900.80. b. disbursed to the borrower is $1,800. c. repaid is $1,699.20. d. repaid to the borrower is $1,800. e. disbursed to the borrower is $100.80.

b

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

b

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

b

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.

b

The Rule of 78s is used to calculate the _____ when an installment loan is paid off early. a. APR b. balance due c. prepayment penalty d. basic cost of money e. amount saved

b

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%.

b

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 tax deductible. c. A home equity loan is generally the first mortgage loan. d. A home equity loan is a single-payment loan.

b

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 e. Asset management companies

b

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.

b

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.

b

_____ 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. S&Ls

b

A legal claim that allows lenders to liquidate loan collateral, in case the borrower defaults, is called a: a. loan contract. b. promissory note. c. lien. d. security claim. e. rollover.

c

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

c

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. disbursed to the borrower is $2,049.20. c. repaid is $2,350.80. d. disbursed to the borrower is $2,350.80. e. disbursed to the borrower is $150.80.

c

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%

c

Most loans made by savings and loan associations are: a. home improvement loans. b. auto loans. c. mortgage loans. d. education loans. e. consolidation loans.

c

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

c

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.

c

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 e. A savings bank

c

Which of the following statements regarding credit unions is true? a. They make secured loans only to non-members. 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 profit-making organizations.

c

You are borrowing $1,000 with an APR of 10% and a loan maturity of 1 year. Total interest charges will be the highest when: a. you pay off the loan in 12 monthly installments. b. you pay off the loan in 10 monthly installments. c. you make one payment in full at the end of the year. d. you prepay the loan 6 months prior to the maturity of the loan. e. you pay off the loan within 30 days.

c

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

d

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.

d

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.

d

It is better to use your savings instead of borrowing to make a purchase when: a. the borrower has 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.

d

The monthly payment (rounded to the nearest dollar) on an 8%, 36-month, add-on loan of $10,000 would be: a. $278. b. $300. c. $314. d. $344. e. $380.

d

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.

d

You should consider your _____ before you take on a large consumer loan. a. educational qualification b. history of auto ownership c. past employment d. financial plans e. career plans

d

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

e

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 to finance the purchase of very expensive items.

e

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.

e