6.1 High-Cost Consumer Loans

Which of the following provides the least expensive alternative to meet an unforeseen financial expense?

• Money in a savings account

• A credit card

• A short-term loan until the next pay day

• A short-term car loan

Which of the following lenders will likely provide the lowest interest rate to qualified borrowers?

• Banks and credit unions

• Credit card company

• Title loan lender

• Retail/store credit card

Some consumers may not understand the high cost of borrowing in the alternative financial services market and instead focus on ​ (a)   to justify using alternative financial services

• Convenience
• Cost
• Fee Structure
• Long-Term Expenditure

Susan borrowed money from her credit union using her car as collateral. The monthly interest rate on the loan is 0.2%. There were no other fees associated with the loan. What is the APR of Susan's car loan? Assume 12 equal months

• 0.2% APR

• 2.4% APR

• 2.0% APR

• 24.0% APR

Answer explanation

Use the given percent and multiply it by 12 months for the answer

Levi needs some cash in a hurry. He owns his car outright and is considering a title loan. The lender has told Levi that he could borrow $1,000 for 1 month and the fee would be $100. What is the APR on Levi's loan? Assume 12 equal months.

• 10% APR

• 100% APR

• 120% APR

• 200% APR

Answer explanation

Step 1: $100/$1,000 = ?

Step 2: 12 months / 1 month = ??

Step 3: ? X ?? = ???

Step 4: 100 X ??? = ????

Aman is attending school and had a financial emergency. He contacted his school's financial aid office and asked about a subsidized student loan. Aman's school facilitates these loans and determined that Aman qualifies for a $500 loan. Aman is able to repay the loan over the next 12 months while he is still in school. How much interest will Aman pay on this loan?

• $0 because interest on subsidized loans does not accrue until Aman stops attending school

• $25 because the interest rate is 5%

• $12.50 because Aman has been making payments on the loan

• None of the answer choices are correct

Izzy just received a credit card offer in the mail. The credit card has an APR of 18%. What is the monthly interest rate that will apply to any unpaid balance on this credit card? Assume 12 equal months.

• 18.0%

• 1.0%

• 1.5%

• 1.8%

Answer explanation

Take the APR as a decimal and divide that by 12 for the monthly interest rate.

All of the following statements are true, EXCEPT:

• Reliance on credit reports and credit scores often differentiates mainstream and alternative financial service providers

• There is a relatively small difference in the total finance charge between mainstream and alternative financial service providers

• Individuals without credit reports should always first apply to mainstream lenders

• Individuals with emergency funds are less likely to use high-cost loans

In a recent survey, U.S. households were asked how they would come up with $2,000 in an emergency. What percentage of those who said they could get $2,000 in an emergency said they would use alternative financial services?

• 5%

• 7%

• 11%

• 20%

Some individuals facing financial emergencies will attempt to skip certain payments to make other payments. This strategy is generally not helpful because:

• the individual's credit report and credit score will be tarnished

• if income does not increase or expenses do not decrease, then nothing will change in the long run

• this will likely lead to higher borrowing costs in the future

• All of these answer choices are correct