Chapter 9

You obtain a loan of $3,000 based on simple interest with an annual interest rate of 12 percent. At the end of the first month, the interest owed on $3,000 is A) $30. B) $36. C) $300. D) $360.

A) $30

A few years ago Mary purchased a home for $100,000. Today the home is worth $150,000. The remaining balance on the mortgage is $50,000. If Mary can borrow up to 80% of the market value of the equity, the maximum amount she can borrow is A) $80,000. B) $70,000. C) $100,000. D) $50,000.

A) $80,000

Which of the following statements about student loans is not true? A) If you don't complete your education, you will not have to pay back your student loan. B) A school's financial aid office is one of the best sources of information on student loans. C) Both the federal government and financial institutions participate in the student loan program. D) Interest is often deferred and there are some tax savings on the interest paid on student loans.

A) If you don't complete your education, you will not have to pay back your student loan.

Automobile insurance rates are likely to differ for all of the following reasons except some cars A) are more popular than others. B) cost more to repair after accidents. C) are more common theft targets. D) are higher priced.

A) are more popular than others

Considerations in selecting a car should include all of the following except A) what kind of car you really want, regardless of what you need. B) the size of the car. C) the price of the car. D) the size of the engine and fuel economy.

A) considering what kind of car you really want, regardless of what you need

The loan contract identifies all of the following except A) loan officer. B) maturity. C) loan repayment schedule. D) collateral.

A) loan officer

Common practices used by dishonest lenders include all of the following except the lender A) prohibiting the borrower from purchasing insurance or other financial services as a condition of the loan. B) charging high loan fees which cause financing costs to be much higher than the quoted rates. C) requiring that the borrower purchase insurance or other financial services. D) having a large balloon payment that will require additional financing to pay it off.

A) prohibiting the borrower from purchasing insurance or other financial services as a condition of the loan.

If you double the principal repayment called for on your car loan each month without doubling the interest payment, you will A) reduce the term of the loan by half B) reduce the amount of interest you pay by about 30% C) not have much effect since you are not also doubling interest paid monthly D) both A and B are correct

A) reduce the term of the loan by half

Which of the following is the most common source of financing for personal loans? A) Family and friends B) Financial institutions C) Credit cards D) Sales finance companies

B) Financial institutions

What is the correct chronological order of the items listed below? A) Good credit history, loan contract, repayment schedule, loan application B) Good credit history, loan application, loan contract, repayment schedule C) Good credit history, repayment schedule, loan application, loan contract D) Good credit history, repayment schedule, loan contract, loan application

B) Good credit history, loan application, loan contract, repayment schedule

The Truth-in-Lending Act (1969) requires which of the following? A) Adherence to the interest rates established by the Federal Reserve B) Specifying a standard loan rate C) Disclosure of only interest charges but no other fee D) All of the above

B) Specifying a standard loan rate

Which of the following items would a personal loan be a better option than a credit card for a college student? A) Car maintenance expense B) Tuition and dorm fees C) Trips home for the holidays D) Tickets to sporting events

B) Tuition and dorm fees

Disadvantages of leasing a vehicle include all of the following except A) no equity in the car. B) cost of finding a buyer for the car at the termination of the lease. C) responsibility for maintenance costs. D) additional charges beyond the monthly lease payments.

B) cost of finding a buyer for the car at the termination of the lease.

The more expensive the car, the ________ the payments, and the ________ you can put away in other investments. A) higher; more B) higher; less C) lower; less D) lower; more

B) higher; less

Each of the following provide personal loans except A) commercial banks. B) insurance companies. C) finance companies. D) credit unions.

B) insurance companies

When considering how much money to spend on the purchase of a new car, you must consider how your choices affect your spending on other needs. The ________ solution limits your purchases to what you can afford pay off when your credit card bill arrives each month. A) maximum debt B) limited debt C) no debt D) minimum debt

B) limited debt

When assessing the condition of a used car, you should carefully consider all of the following except A) the condition of the interior. B) the insurance premium the previous owner paid. C) the condition of the exterior. D) the history of routine maintenance.

B) the insurance premium the previous owner paid.

All of the following are true regarding a cosigner on an account except A) the cosigner is responsible for any unpaid balance. B) the lender may not seize the assets of a cosigner. C) cosigning an account is a big liability and should be taken seriously. D) cosigning on a loan can restrict the amount that the cosigner is able to borrow.

B) the lender may not seize the assets of a cosigner

In a loan repayment schedule, the term amortized refers to A) the method by which interest is calculated. B) the repayment of the principal through a series of equal payments. C) the life of the loan. D) assets used to back the loan.

B) the repayment of the principal through a series of equal payments

What is the total cost of leasing a vehicle for three (3) years that requires a security deposit of $300 (would earn 3% interest in a money market account otherwise), has monthly lease payments of $385, and has a mileage restriction of 10,000 with excess mileage resulting in a 10 cents per mile charge. Assume that the lease exceeds this limitation by 8,000 miles. A) $14,160 B) $13,860 C) $14,687 D) $14,660

C) $14,687

Which of the following methods of calculating interest is the most expensive? A) Annual percentage rate or APR B) Simple interest C) Add-on interest D) Sum of the digits

C) Add on interest

What should you not consider when selecting a vehicle? A) Personal preferences B) Insurance costs C) All parts are American-made D) Resale value

C) All parts are American made

The ________ the maturity of a loan, the ________ the payments. A) longer; smaller B) shorter; larger C) Both A and B D) shorter; smaller

C) Both A and B

Which of the following is a true statement about student loans? A) All student loans are provided directly to the student. B) All student loans are provided to parents of students. C) Interest payments are often deferred until the students graduate and enter the workforce. D) Interest is tax-free to those in all income levels.

C) Interest payments are often deferred until the students graduate and enter the workforce.

Which of the following items must you provide when applying for a loan in order to prove you have collateral to back your loan? A) Personal cash flow statement B) Paycheck stub C) Personal balance sheet D) Credit card statements

C) Personal balance sheet

When negotiating the price of any car, which of the following statements is true? A) The car dealer earns a small profit if the customer doesn't negotiate and pays full price. B) Dealers that negotiate will purposely price cars below the price for which they are willing to sell the car. C) Sales people are trained to act as if they are giving the car away. D) The salesman is uncertain of the price at which he can sell you the car until you begin negotiations.

C) Sales people are trained to act as if they are giving the car away

In which of the following scenarios would you favor leasing over purchasing a car? A) The miles that you drive each year varies significantly and is hard to predict B) Repair expenses on the car are very low C) The car in question is one whose value depreciates rapidly D) All of the above

C) The car in question is one whose value depreciates rapidly

If you always drive cars many miles and keep them for 10 years, it would probable be best to A) lease a new car. B) lease a used car. C) buy a new car. D) buy a used car.

C) buy a new car

Over the life of a loan, the payment to principal ________ and the portion to interest expense ________. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases

C) increases; decreases

Regarding automobile insurance, A) the best time to shop for rates is while you are at the car dealership. B) most cars cost the same to insure if the driver is the same. C) it is better to compare costs before you commit to buying a particular car. D) you can lower your costs by buying a more expensive car that is less likely to have accidents.

C) it is better to compare costs before you commit to buying a particular car.

All of the following are true of peer-to-peer lending, except A) it involves online platforms B) borrowers generally have high FICO scores C) loans are available only for amounts less than $1,000 D) interest rates may be lower than at financial institution

C) loans are available only for amounts less than $1,000

If you are considering trading in a used car on your new one, it is best to A) tell the dealer right away so he can figure your trade-in credit against the purchase of your new car. B) not trade the car in, but rather sell it yourself to someone else. C) make the trade-in deal a separate transaction for the new car deal. D) not be too concerned about the value given, since dealers are required to give you at least blue book value.

C) make the trade-in deal a separate transaction for the new car deal.

In the past you have purchased cars that you have driven for over 10 years or more. The mileage on these vehicles usually exceeded 100,000 and therefore you just give them to one of your teenaged nieces/nephews or your grandchildren. Based on this history, your primary financial selection criteria will be A) resale value. B) financing rate. C) repair expense. D) personal preference.

C) repair expense

If you agree to allow the lender to take your computer in the event you fail to make payments, the loan is which of the following? A) Amortized B) Unsecured C) Secured D) Interest free

C) secured

Personal loans from family members or friends A) are not good sources of financing. B) are more expensive than loans from other sources. C) should have a loan agreement in writing to avoid problems later on. D) are not desirable from the lender's point of view.

C) should have a loan agreement in writing to avoid problems later on

The size of the monthly payment on a loan is dependent on all of the following except A) principal borrowed. B) interest rate. C) your age. D) maturity.

C) your age.

The advantage to financing a car for a long period of time (of up to seven years) is A) you will build equity in the car faster. B) the car will be worth more by the time you pay off the loan. C) your monthly payment will be lower. D) you will be able to sell the car before you pay off the loan and have money to pocket.

C) your monthly payment will be lower.

You could reduce the interest rate you are paying on loans by A) refinancing to a secured loan B) paying off credit card debt with a home equity loan C) refinancing to a shorter term loan D) A, B, and C are all viable possibilities

D) A, B, and C are all viable possibilities

The method of determining the monthly interest amount by adding the interest and loan principal together and dividing by the number of payments is the A) simple-interest method. B) annual percentage method. C) simple-interest declining balance method. D) add-on interest method.

D) add on interest method

All of the following are true of a home equity loan except it A) provides you a line of credit. B) is a good way to combine different kinds of debt. C) may be tax deductible. D) allows you to borrow up to 80% of the market value of your home.

D) allows you to borrow up to 80% of the market value of your home.

A personal loan is different from a credit card in all of the following except it A) is normally used to finance one large purchase. B) has a specific repayment schedule. C) can be used only once. D) contains a longer grace period.

D) contains a longer grace period.

You could reduce the size of your monthly payments by A) agreeing to a higher interest rate. B) borrowing the same amount of money but for a shorter period of time. C) borrowing more money initially for the same period of time. D) lengthening the maturity.

D) lengthening the maturity

Advantages of leasing a vehicle include all of the following except A) no substantial down payment. B) don't have to worry about resale of the car when you are finished with it. C) less hassle than purchasing a vehicle. D) no maintenance costs.

D) no maintenance costs.

Purchasing a car is a big decision. Therefore you should not A) use the Internet to price shop. B) read Consumer Reports to find a good car value. C) ask a friend or relative to go with you to the car lot. D) rely on the dealer personnel as the best source of expert advice.

D) rely on the dealer personnel as the best source of expert advice.

Which is true regarding resale value of cars? A) You can't really determine the resale value very accurately before you buy a car. B) You are always better off to buy a higher priced car with a greater resale value. C) You are always better off to buy a lower priced car with a lower resale value. D) Resale values can be determined from the Internet and other sources and should be a consideration in buying a car.

D) resale values can be determined from the internet and other sources and should be a consideration in buying a car.

The cost of leasing a car versus purchasing one A) is more. B) is less. C) is about the same. D) varies depending on a multitude of factors.

D) varies depending on a multitude of factors.

In securing personal loans from family members or friends, the loan agreement should be verbal or just consist of a "gentleman's understanding." (true/false)

False

It is usually better to lease a vehicle than buy one, since you are not responsible for the repairs or maintenance on a leased car. (true/false)

False

When applying for a personal loan, you will be required to fill out a loan application but you will seldom need a personal balance sheet or a personal cash flow statement. (true/false)

False

A payday loan is a short-term loan provided to you if you need funds in advance of receiving your paycheck. (true/false)

True

A personal loan is different from a credit card in that it is normally used to finance one large purchase. (true/false)

True

Buying a car from a dealer with a set price (a no haggle dealer) is usually more stress-free and less time consuming. (true/false)

True

If the interest rates are the same, a loan using add-on interest will have higher payments and charges than a loan using simple interest.(true/false)

True

In general, you will receive more favorable terms on a secured loan than on an unsecured loan. (true/false)

True

Longer maturities for loans result in lower monthly payments and therefore make it easier to cover payments each month. (true/false)

True

The proceeds from a home equity loan can be used for any purpose including a vacation, tuition payments, or health care expenses. (true/false)

True

There are limits on how much a student can borrow each year through federal student loans, so many students also have to obtain private loans from financial institutions. (true/ false)

True

Having a longer term loan A) costs you more interest and therefore increases the cost of your loan. B) makes your monthly payments larger. C) is almost always the best alternative for credit users. D) gives you access to additional sources of financing.

A) costs you more interest and therefore increases the cost of your loan.

Because interest is tax deductible and payments are deferred until you graduate, it is good advice to take out the maximum student loan for which you can qualify. (true/false)

False

Even an unsecured personal loan should be backed by collateral. (true/false)

False

Financial institutions provide home equity loans up to a maximum of 70% of the value of the equity in a home. (true/false)

False

You obtain a loan of $3,000 based on simple interest with an annual interest rate of 12 percent, or 1% a month. If the first payment is $300, how much is the principal portion of the payment? A) $27 B) $270 C) $280 D) $295

B) $270

You have a home with a market value of $200,000. Your total equity in the home is $40,000. The maximum home equity loan available if the bank will loan 80% based on equity invested is A) $28,000. B) $32,000. C) $112,000. D) $128,000.

B) $32,000

Which of the following is not usually used as collateral for a loan? A) A boat B) Clothing C) A car D) A house

B) clothing

Personal loans include the following except A) car loans. B) mortgage loans. C) student loans. D) home equity loans.

B) mortgage loans

Which kind of loan generally has the lowest interest rate charged? A) Unsecured loan B) Secured loan C) Cash advance D) Vacation loan

B) secured loan

The personal loan process with a financial institution requires all of the following except A) filling out an application. B) sitting through an interview. C) negotiating the loan contract. D) negotiating the interest rate.

B) sitting through an interview

The APR measures the finance expenses (including interest and all other expenses) on a loan on a(n) A) quarterly basis. B) annualized basis. C) monthly basis. D) daily basis.

B) annualized basis

The document that specifies the term of the loan as agreed to by the borrower and lender is called the A) loan repayment schedule. B) loan contract. C) loan application. D) terms of agreement.

B) loan contract

All of the following are reasons to avoid payday loans except A) the cost of financing with a payday loan is exorbitant. B) you don't want to pay interest on your credit card that charges an annual rate of 18%. C) you may still not have sufficient cash after covering the loan. D) the use of payday loans can create a continual cycle of borrowing.

B) you don't want to pay interest on your credit card that charges an annual rate of 18%.

Regarding the amount of money borrowed on a loan, all of the following are true except A) the amount is based on how much the lender believes you can pay back in the future. B) you should borrow slightly more than you need to cover future inflation. C) you should only borrow the amount you need. D) you will have to pay interest on the entire amount.

B) you should borrow slightly more than you need to cover future inflation

You obtain a loan of $3,000 to be repaid over one year. Assume you are charged 12% interest based on the add-on method. You monthly payments would be A) $280.00. B) $300.00. C) $360.00. D) $270.00.

A) $280

Lucky Louie applied for a $5,000 loan payable in one year and was provided the following data; interest due at payoff of $750, application fee $100, credit check $75, processing fee $75. What is the APR of Louie's loan? A) 20% B) 17.5% C) 22.5% D) There is not enough information to determine the answer

A) 20%

Rick needs an advance on his $600 bi-weekly paycheck. He goes to Cash King where he writes them a check for $690 and dates the check two weeks from today. The cost of financing Rick's payday loan is A) 391%. B) 521%. C) 261%. D) 547%.

A) 391%

Which of the following would probably not be required when applying for a personal loan? A) A personal resume B) A personal balance sheet C) A personal cash flow statement D) A loan application

A) A personal resume

Which of the following is a key benefit of leasing? A) You do not have to fill out a credit application B) You do not have to maintain the car since you do not own it C) You are able to drive a more expensive car for the same monthly payment versus buying D) A, B, and C are all correct

C) You are able to drive a more expensive car for the same monthly payment versus buying

All of the following cash needs are appropriately sourced from a home equity loan versus credit card or short term personal loan, except for A) renovating your home B) buying a new car which you plan to keep for 10 years C) going to Disneyworld with your family D) A, B, and C are all correct

C) going to Disneyworld with your family

When deciding whether to trade in a car or sell it privately, which of the following is not a consideration? A) "ACV" or actual cash value being offered by the dealer B) Private sale price you think you can achieve if you sell the car yourself C) Sales tax offset for the trade-in offered by many states D) Year, make, and model of the car

D) Year, make, and model of the car

Collateral is defined as assets of the lender that back a secured loan in the event of default. (true/false)

False

In determining the amount of your loan, you should ask for about 20% more than you need in order to give yourself financial flexibility in the future. (true/false)

False

Leasing a car is a good option if you drive many miles a year. (true/false)

False

On an amortization schedule, more interest and less principle is paid each month as the loan matures. (true/false)

False

Shopping for automobile insurance should begin immediately after you close the deal on the car. (true/false)

False

The cost of financing with a payday loan is more reasonable than the cost of obtaining credit through a credit card. (true/false)

False

The monthly payment for a loan is dependent only on the size of the loan and the interest rate. (true/false)

False

Advantages to leasing a car instead of buying one are that you need less of a down payment and that you do not need to worry about finding a buyer for your car when the lease is over. (true/false)

True

Auto loan Internet sites are a good source to estimate the maximum amount you can borrow, based on financial information you provide. (true/false)

True

Because the market value of homes may decline, lenders do not like to lend the full amount of the equity when extending a home equity loan. (true/false)

True

Determining the amount of money you can afford to borrow on a personal loan is a decision that should be included in your personal financial plan. (true/false)

True

Even though you don't use the proceeds to improve your home, the interest on a home equity loan is deductible from your federal income taxes. (true/false)

True

Home equity is defined as the market value of the home less the debt owed on the home. (true/false)

True

If a loan is cosigned and the borrower defaults, the lender has the right to sue the cosigner or try to seize his assets just as if he were the borrower. (true/false)

True

One alternative to payday loans is to avoid borrowing until you have the funds to spend. (true/false)

True

The decision to purchase versus lease a car is highly dependent on the estimated market value of the car at the end of the lease period. (true/false)

True

The most common source of financing is a personal loan from a financial institution. (true/false)

True

When borrowing money from a family member or a friend, the loan agreement should be in writing and signed by all parties to avoid any possible misinterpretations. (true/false)

True

Since all student loans are not issued at the same interest rate over the course of a student's education year, once the student graduates and begins working and is starting the pay back the loans they should A) defer payment as long as possible B) make only the minimum payments C) prioritize the loans from highest interest rate to lowest interest rate and use excess cash flow to make additional payments on the high rate loans D) pay all loans at an equal pace since they all count in your credit score

C) prioritize the loans from highest interest rate to lowest interest rate and use excess cash flow to make additional payments on the high rate loans

Buying a new car on line is just about as efficient as buying an airline ticket or a book. (true/false)

false

It is important to buy a car that is not over your budget and to finance the car properly. The more money needed to cover the car payments, the less you can add to your savings or other investments. (true/false)

true

What would be the total cost of leasing a vehicle for four (4) years that requires a security deposit of $1,000 (which would be withdrawn from your portfolio, which earns 9% per year), has monthly lease payments of $500, and has a mileage restriction of 20,000 with excess mileage resulting in a 10 cents per mile charge. Assume over the life of the lease you exceed the mileage limitations by a total of 8,000 miles. A) $24,000 B) $24,360 C) $24,800 D) $25,160

D) $25,160

Which of the following are important factors in determining the monthly lease price of a new car? A) Purchase price or capitalized value B) "Money factor" or interest rate embedded in the lease C) Residual value of the car included in the lease contract D) A, B, and C are all key factors in determining the monthly lease payment

D) A, B, and C are all key factors in determining the monthly lease payment

Personal loans include which of the following? A) Car loans B) Credit card advance payments C) Home equity loans D) Both A and C

D) Both A and C

The most favorable car financing is that of A) commercial banks. B) credit unions. C) car dealers. D) There is no one best deal every time; it pays to shop around.

D) There is no one best deal every time; it pays to shop around.

Collateral A) gives the lender additional recourse if the payments are not made. B) is used on unsecured loans. C) increases the interest rate on loans. D) is required on all loans.

A) gives the lender additional recourse if the payments are not made.

If you borrow an $8,000, 6.75% home equity loan, what is your tax savings for one year assuming your marginal income tax rate is 15%? A) $540 B) $81 C) $270 D) $162

B) $81

Financial institutions provide home equity loans up to ________ of the value of the equity in a home. A) 75 percent B) 80 percent C) 70 percent D) 85 percent

B) 80 percent

Making extra payments on a loan does all of the following except: A) Reduces the total amount of interest paid B) Gives you extra income for living expenses C) Reduces the maturity of the loan D) Helps assure your good credit rating

B) Gives you extra income for living expenses

Frank purchased his home in 1997 for $130,000. He added an addition costing $35,000. The current tax assessed value is $80,000 while the current market value is $185,000. If Frank's current mortgage balance is $95,000, his equity in his home is A) $130,000. B) $165,000. C) $90,000. D) $70,000.

C) $90,000

Which of the following is not included in a loan contract? A) Credit score B) Amount of the loan C) Interest rate D) Loan repayment schedule

A) credit score

In making the purchase versus leasing decision, it is important to remember that A) dealers may impose an additional mileage cost. B) leasing is less risky than a purchase. C) leasing is less expensive that a purchase. D) you won't be required to pay maintenance costs on the leased car.

A) dealers may impose an additional mileage cost.

Which of the following is not an interest rate calculation method discussed in the text? A) Annual percentage rate or APR B) Sum of the digits interest C) Simple interest D) Add-on interest

B) Sum of the digits interest