Finance Chapter 7 Test Questions

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?

20%

Loan repayment under the Parent Loans for undergraduate students (PLUS) program normally begins within _____ of loan disbursement

60 days

Which of the following statements regarding a consumer loan is true?

A consumer loan is the finance of very expensive items

(T/F) Most consumer loans are made at fixed fates of interest

True

(T/F) Parent loans for undergraduate students (PLUS) loans are made to the parents or legal guardians rather than to the students

True

(T/F) The cash value of some types of life insurance policies can be used as collateral for loans

True

(T/F) 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

True

Commercial banks are able to charge lower interest rates than other lending institutions because

They usually take only the best credit risks

(T/F) If your debt safely ratio works out to be 10%, you are relying too heavily on credit

False, Supposed to be 20%

A loan rollover means that

The loan is paid off by taking out another loan

Which of the following statements regarding loan maturity is true

The longer the loan maturity, the higher the amount of interest paid

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.

Collateral

Which of the following statements regarding loan collateral true?

Collateral is an item of value used to secure the principal portion of a loan

A _____ loan is intended to help consumers who have an unhealthy credit situation caused by overusing their credit

Consolidation

Which of the following sources of consumer loans often has the most favorable terms for borrowers

Credit unions

____ loans do not have to be repaid until after you graduate from college

Direct and Perkins

(T/F) Fixed rate loans are desirable if interest rates are expected to fall over the course of the loan

False

(T/F) From a financial planning perspective, you need not worry about the size of monthly payments when taking a loan

False

(T/F) Home equity loans are similar to home equity credit lines because they are also not secured with any collateral

False

(T/F) 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

False

(T/F) It is legal for a lender to charge a prepayment penalty

False

(T/F) Loans obtained by the life insurance policyholders from their insurance companies are to be repaid on the date established by the loan documents

False

(T/F) The debt safety ratio indicated the total assets owned by an individual

False

(T/F) You can borrow, repay, and reborrow from a home equity loan in the same way as you can from a home equity credit line

False

You should consider your ____ before you take on a large consumer loan

Financial plans

Which of the following statements regarding fixed rate loans is true?

Fixed rate loans are preferable when interest rates are expected to rise

If a loan has a prepayment penalty, there will be an additional cost to repay the loan early

If the lender wants to recover part of the full interest that would have been earned

A(n) ____ loan is repaid in a series of fixed, scheduled payments rather than in a lump sum

Installment

A legal claim that allows creditors to liquidate loan collateral is a

Lien

A legal claim that allows lenders to liquidate loan collateral, in case the borrower defaults, is called a

Lien

Credit unions lend money to qualified people who are their

Members

Most loans made by savings and loan associations are

Mortgage loans

If you borrow money on a single payment loan and discover you cannot pay it back when it is due you should

Negotiate a rollover

The most common use of consumer loans is to

Purchase a car

Borrowing from ____ is not advisable

Relatives

It is better to use your savings instead of borrowing to make a purchase when

The cost of borrowing is much greater than the interest earned on savings