Ch 11 Test Prep

Which of the following people does not have a financially sound reason for taking a personal loan?

• 1. Ramon has the money to buy a car, but he can invest the money and make more than he will be charged for his car loan.

• 1. Carrie needs to borrow money to pay for her last year of college.

• 1. David needs to borrow $1,000 so that he can buy season tickets to see the Yankees play.

• 1. Tanya has enough money to make a 20% down payment on a new car, and she knows that she can pay the balance if she has a loan for 2 years.

Which of the following terms is not correctly matched with its definition?

• Principal: the amount borrowed.

• Terms of the loan: cost of the item if it is not financed.

• Down payment: the amount of money the buyer gives toward the purchase.

• Repayment schedule: number of months needed to repay the entire loan along with the dollar amount of each payment and the interest.

Why does a lender want information about a person’s current cash inflow and outflow?

• The information helps to determine the number of cosigners a person will need for the loan to be approved.

• Most lenders do not make loans to anyone whose assets are not twice his liabilities.

• The lender needs to know the person’s credit score before making the loan.

• The information helps the lender decide on the person’s ability to pay back the loan.

What is the purpose of a loan contract?

• It is an offer by the lender to sell something at a given price to another person.

• It is a legally binding agreement that explains the charges to be paid by the buyer and the obligations of the seller.

• It is a promise made to the credit bureaus that the lender will protect the buyer from bankruptcy until the loan is paid in full.

• It is a legally binding agreement that guarantees that the buyer will pay the lender in full and on time.

Why is it possible that the interest rate advertised for a loan is very different from the annual percentage rate (APR) on that loan?

• The APR includes loan application fees, credit report check, and other costs, in addition to the annual interest.

• The APR provides for a 10% annual discount if all loan payments are made on time.

• The advertised loan was not multiplied by 12 to figure out the annual percentage rate.

• The advertised loan is a teaser rate, and the APR is the interest rate after the teaser rate expires.

Why should a person be very careful before agreeing to cosign a loan?

• The cosigner is required to deposit the amount of the loan into a special bank account until the loan is paid in full.

• The cosigner is agreeing to pay half of the loan.

• The cosigner’s credit score will be changed to the score of the primary borrower.

• If the borrower defaults on the loan, the lender will expect to receive full payment from the cosigner.

A person learns that the interest rate on his $2,000, 1-year auto loan is 5%. He is about to apply for the loan when a friend says that he should first know the APR on the loan. He discovers that there is a $50 application fee, a $50 credit check fee, and a $100 charge related to other closing costs. What is the APR on this loan?

• The APR is 5%.

• The APR is 10%.

• The APR is 15%.

• The APR cannot be determined from the information given.

A high school senior whose family is very poor wants to go to college, but the family cannot afford the expenses. To help finance her education, she should try to obtain the type of loan where interest charges do not build up while she is in school and even during the first few months after graduation. This type of financing is known as a(n)

• bank loan.

• Federal Perkins loan.

• car loan

• unsubsidized Federal Stafford loan.

A person decides to lease a $20,000 car for 3 years instead of buying the car and financing it with a loan. At the end of 3 years, the car is worth $11,000. How much will he receive when he returns the car to the dealership?

• He will only get his security deposit back if one was required, minus the cost of any damages that have occurred to the car.

• He will receive $11,000, minus the cost of any damages that have occurred to the car.

• He will receive whatever amount of money the dealer is able to get by selling the car as a used vehicle.

• He will receive half of what the dealer gets from the sale of the used car.

A disadvantage of paying for a car with a long-term loan is that

• the monthly loan costs are higher than the same loan taken for a shorter time.

• the person cannot take possession of the vehicle until at least half of the loan has been paid.

• toward the end of the loan, it is possible to owe more on the car loan than the car is worth.

• the loan increases in size and the interest rate on the loan increases.