EverFi 6 Credit

Which of the following describes a loan?

• Type of insurance coverage for unexpected losses

• Borrower promises to repay money from a lender

• Government grant for education

• Tax deduction for mortgage interest payments

Answer explanation

Loans allow you to borrow money to make large purchases. People get loans for things like cars, houses, college, and more

Dom wants to buy a new car. He doesn't have enough money in his savings account right now so he decides to get a loan from the bank. How can taking a loan help with buying the car?

• It can reduce his total amount of debt

• It can help by not requiring any immediate down payment

• It can help by spreading out the expense over time

• It can help by having no impact to his credit score

Answer explanation

Loans make large expenses more manageable because you pay a little bit each month. After several years you have paid off the loan.

What best describes the difference between secured and unsecured loans?

• Secured loans require collateral, unsecured loans do not

• Secured loans usually have higher interest rates

• Secured loans do not appear on your credit report

• Secured loans have more flexible payment plans

Answer explanation

Secured loans have collateral - something you can lose if you do not pay it back.

For example - if you do not pay back your car loan, the lender can take your car and sell it to get their money.

Hailee remodels her home using a loan that required her to give the title to her car if she does not repay the loan as promised. What type of loan does Hailee have?

• Secured

• Unsecured

• Student

• Interest-Free

What best describes how loan terms affect the cost of loans?

• Shorter Term = Higher monthly payments and higher overall cost

• Longer Term = Lower monthly payments but higher overall cost

• Term length does NOT impact loan cost

Answer explanation

Longer terms look nice on paper. You pay less each month! However, you are making the payments for longer and they actually end up costing more.

If you have a 3 year loan that costs $100 a month or a 5 year loan that costs $80 a month the 3 year loan costs a total of $3600 (3x12 months x 100). The 5 year loan costs $4800 (5x 12 months x 80)

Aisha needs a loan to finance her latest startup. She wants a loan with the lowest overall interest costs. She’s considering a 3-year loan with an 8% fixed interest rate or a 5-year loan with a 6% fixed interest rate. Why would Aisha pick the 3-year loan?

• It has a lower total cost

• It has a smaller monthly payment

• It has a lower interest rate

• It has a higher loan amount

A lender has offered Michelle a high-interest loan based on her paycheck. She will have to pay it back quickly within a month. What type of loan did she get?

• Payday Loan

• Bait and Switch Loan

• Hidden Fees Loan

• Phising Scam

Answer explanation

Payday loans generally hurt borrowers. You get a loan for your paycheck and the interest might be 100% or more. So you borrow $2,000 but at the end of the month you need to pay back $4,000!

People get them when they REALLY need money, but they usually cause more harm than good.

DON'T GET PAYDAY LOANS

When choosing a credit card, the interest rate is generally shown in the section called...

• APR

• Annual Fee

• Rewards

• Late Fees

Answer explanation

APR = annual percentage rate. This is your interest rate spread out over the entire year.

The lower your APR the less you pay in interest

A loan where you make payments each month is known as a...

• Installment Loan

• Payday Loan

• Credit Card

• Unsecured Loan

When getting a loan you can put money down called a down payment. The MORE you put down the...

• less your loan will cost overall

• more your loan will cost overall

• loan will be unaffected

Answer explanation

When you put more money down for the down payment, you end up borrowing LESS so your loan will cost less.

If you are buying a $10,000 car and put down $1,000, you must borrow $9,000 total and pay interest.

If you put down $3,000 instead, you only need to borrow $7,000 and will pay less interest overall.

If you can afford to, it's usually good to put MORE money down.