FIR 1220 Module Quiz 3
Russ and Lois have a home valued at $116,000 with an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of the market value of the home, how much can they borrow using a home equity loan?
$27,000 (Amount that can be borrowed by Russ and Lois = ($116,000 × 0.75) - $60,000 = $27,000.)
Sheldon has a home valued at $125,500 with an outstanding mortgage of $70,000. If his lender is willing to provide a home equity loan of up to 80% of the market value of his home, how much can Sheldon borrow using a home equity loan?
$30,400 (Sheldon can borrow $30,400 using a home equity loan. The amount that Sheldon can borrow = ($125,500 × 80%) - $70,000 = $100,400 - $70,000 = $30,400.)
If your monthly before-tax income is $2,500 and your monthly take-home pay is $2,000, your maximum monthly consumer credit payments should not exceed:
$400. (The debt safety ratio indicates the maximum monthly consumer credit payments that can be made by an individual. These payments should not exceed 20% of the monthly take-home pay. Based on this, the maximum monthly payments equal 20% of $2,000, which is equal to $400.)
If Liza's debt safety ratio is 15% and her monthly take-home pay is $3,000, which of the following equals her total monthly payments?
$450 (Debt Safety Ratio = Total Monthly Payments ÷ Monthly Take-Home Pay 0.15 = Total Monthly Payments ÷ $3,000 Total Monthly Payments = 0.15 × $3,000 = $450)
Clare's annual gross salary is $36,000, and her after-tax income is $27,000. What is Clare's maximum recommended monthly consumer credit payment?
$450 (The debt safety ratio indicates the maximum monthly consumer credit payments that can be made by an individual. These payments should not exceed 20% of the monthly take-home pay. Clare's maximum monthly payment = (0.20 × $27,000) ÷ 12 = $450.)
As a percent of take-home pay, monthly consumer credit payments should not exceed:
20%.
Jenny's monthly take-home pay is $5,000, and her total monthly payments are $2,000. Which of the following is Jenny's debt safety ratio?
40% (Debt Safety Ratio = Total Monthly Payments ÷ Monthly Take-Home Pay = $2,000 ÷ $5,000 = 0.4, or 40%)
You are borrowing $5,000 at a 9% interest rate. The total finance cost will be the highest in a:
48-month repayment plan.
Loan repayment under the Parent Loans for Undergraduate Students (PLUS) program normally begins within _____ of loan disbursement.
60 days
Which of the following will lead to a poor credit rating?
Applying for a long-term loan and occasionally being late with a payment
Which of the following statements regarding loan collateral is true?
Collateral is an item of value used to secure the principal portion of a loan.
_____ loans do not have to be repaid until after you graduate from college.
Direct and Perkins
Which of the following statements regarding fixed-rate loans is true?
Fixed-rate loans are preferable when interest rates are expected to rise.
Which of the following forms of consumer credit is among the cheapest and offers limited tax deductions?
Home equity credit lines
Nancy's take-home income is $3,000 per month, and she currently has a $700 monthly consumer debt. Which of the following statements applies to Nancy's ability to handle additional debt?
Nancy cannot take on additional consumer debt because her debt safety ratio is higher than the lenders' guidelines.
Which of the following is not requested in a typical credit card application?
Political affiliations
Which of the following is an example of phishing?
Pretending to be an employee of a financial institution
Which of the following modes of identity theft involves thieves obtaining your personal information from financial institutions and other sources under false pretenses?
Pretexting
_____ involves some type of debt restructuring by establishing a debt repayment schedule.
The Wage Earner Plan
Which of the following does a lender look at before granting credit to an applicant?
The applicant's age
Which of the following statements regarding loan maturity is true?
The longer the loan maturity, the higher the amount of interest paid.
Which of the following is the correct formula for calculating the debt safety ratio?
Total Monthly Consumer Credit Payments ÷ Monthly Take-Home Pay
If a borrower has a high FICO score, then there is:
a high chance of his or her loan getting approved.
The FICO credit scoring system assigns points according to:
amounts owed.
Mike has a MasterCard with an annual fee of $25, an 18% interest, and a $1,000 credit limit. He always pays the total outstanding balance monthly. His most recent monthly statement lists the previous month's payment, new charges in the current month totaling $1,500, and a $30 fee. The fee is most likely the result of:
an over-the-limit fee.
The Rule of 78s is used to calculate the _____ when an installment loan is paid off early.
balance due
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
Most single-payment loans are secured by:
collateral.
A _____ loan is intended to help consumers who have an unhealthy credit situation caused by overusing their credit.
consolidation
A(n) _____ is a type of reporting agency that collects and sells credit information about individual borrowers.
credit bureau
A payment made using a(n) _____ is equivalent to paying by cash.
debit card
Calculating interest using the _____ will result in the highest APR on a single-payment loan.
discount method
Chapter 7 of the bankruptcy code:
eliminates most of the financial obligations of the borrower.
You should consider your _____ before you take on a large consumer loan.
financial plans
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.
When canceling a credit card, you should cut up the card and _____ that you are canceling your account.
inform the issuer in writing
A(n) _____ loan is repaid in a series of fixed, scheduled payments rather than in a lump sum.
installment
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:
interim financing.
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.
To establish credit, you should first:
open savings and checking accounts.
Any credit card purchase will effectively be an interest-free loan if you have a zero balance when the grace period begins and you:
pay off the entire balance on or before the due date.
The most common use of consumer loans is to:
purchase a car.
If the add-on method is used to calculate a finance charge of $100 on a $2,100 loan, the amount to be:
repaid is $2,200.
If the information in an individual borrower's credit report contains an error, he or she is entitled to:
request a correction.
Using the _____ would be least expensive for the borrower when determining the total amount to be paid to the lender.
simple interest method
When comparing two installment loans with the same principal and annual percentage rate (APR), the loan with:
the longer maturity will have the lower monthly payment and the higher total costs.
Retail charge cards are advantageous to merchants because:
they help build consumer loyalty.
Commercial banks are able to charge lower interest rates than other lending institutions because:
they usually take only the best credit risks.
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:
you make one payment in full at the end of the year.
