Unit 3 Credit Test Practice 1

Which of the following statements is CORRECT about secured loans? 

• They are an example of a credit card 

• They require collateral, in the form of assets like a car or a home, to be exchanged for the loan 

• In the event of default, the borrower loses nothing except for the down payment 

• They usually have higher interest rates as compared with unsecured loans 

Answer explanation

Secured loans have collateral.

If you do not pay the loan, the lender (bank) will take back the item, like a car, boat, house, or business.

You have been working for five years after college and are ready to buy your first home. Homes in the area you want to live in cost $550,000. The biggest mortgage you can afford is $300,000. What is the down payment you will need to pay? 

• $0 

• $200,000 

• $250,000 

• $300,000 

Answer explanation

550,000 - 300,000 = $250,000

Which of the following is most likely to represent a fixed rate, secured debt? 

• A student loan 

• A credit card 

• A loan from a friend 

• A dealer-financed auto loan 

Answer explanation

A secured debt will be backed by collateral. This means the lender (bank) can take back the purchased item: car, house, business.

As a young adult, all of the following are good strategies for building credit, EXCEPT: 

• Open a credit card, with your parent or guardian as a cosigner 

• Open a checking account, and start using a debit card 

• Become an authorized user on a credit card used by your parent or guardian 

• Open and use a secured credit card 

Answer explanation

Checking accounts is not a strategy for building credit.

Elizabeth is considering buying a $30,000 car. Which of these financing options will likely lead to the LOWEST monthly payment? 

• $8000 down payment, 6% interest, 84 months 

• $3000 down payment, 6% interest, 60 months 

• $0 down payment, 6% interest, 60 months 

• $0 down payment, 0% interest, 36 months 

Answer explanation

Having a LARGE down payment will help decrease the amount that is borrowed from the bank.

Taking 84 months (7 years!) to pay of the loan, will make monthly payments smaller.