7. Using Consumer Loans
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1. Consumer loans, like open account credits, result from a rather informal process.
a. True
b. False
2. Most consumer loans are made at fixed rates of interest.
a. True
b. False
3. Fixed-rate loans are desirable if interest rates are expected to fall over the course of the loan.
a. True
b. False
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4. The repayment of the principal of installment loans is made in a lump sum, and the repayment period of installment
loans is 6 to 12 months.
a. True
b. False
5. The frequency of longer-term installment loans carrying variable interest rates is increasing.
a. True
b. False
6. Parent Loans for Undergraduate Students (PLUS) loans are made to the parents or legal guardians rather than to the
students.
a. True
b. False
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7. The cash value of some types of life insurance policies can be used as collateral for loans.
a. True
b. False
8. Loans obtained by life insurance policyholders from their insurance companies are to be repaid on the date established
by the loan documents.
a. True
b. False
9. From a financial planning perspective, you need not worry about the size of monthly payments when taking a loan.
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b. False
10. Rebates are always more cost effective than the 0% annual percentage rate (APR) loans offered on automobile loans.
a. True
b. False
11. If your debt safety ratio works out to 10%, you are relying too heavily on credit.
a. True
b. False
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12. The debt safety ratio indicates the total assets owned by an individual.
a. True
b. False
13. A chattel mortgage is an instrument that gives lenders title to movable personal property in the event of default.
a. True
b. False
14. It is legal for a lender to charge a prepayment penalty.
a. True
b. False
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15. In most cases, lenders take the physical property used as collateral from the borrower and liquidate the collateral until
the loan is repaid in a lump sum.
a. True
b. False
16. The add-on method is less expensive than the simple interest method when the stated rates of interest are identical.
a. True
b. False
17. Home equity loans are similar to home equity credit lines because they are also not secured with any collateral.
a. True
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b. False
18. Only stocks can be used as collateral for personal loans.
a. True
b. False
19. You can borrow, repay, and reborrow from a home equity loan in the same way as you can from a home equity credit
line.
a. True
b. False
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e. buy furniture.
23. A _____ loan is intended to help consumers who have an unhealthy credit situation caused by overusing their credit.
a. personal
b. single-payment
c. buy-down
d. consolidation
e. standard
24. Which of the following statements regarding loan collateral is true?
a. Loans secured by collateral always have higher finance charges than unsecured loans.
b. Collateral is an item of value used to secure the principal portion of a loan.
c. Collateral is always required by banks to lend to customers with good credit ratings.
d. Collateral is an item of value used to secure the interest portion of a loan.
e. Loans are secured by collateral that is readily marketable at a price high enough to cover the interest portion of the
loan.
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25. Which of the following statements regarding fixed-rate loans is true?
a. Fixed-rate loans are preferable when interest rates are expected to rise.
b. The cost of fixed-rate loans increases with an increase in the market interest rate.
c. The cost of fixed-rate loans decreases with a decrease in the market interest rate.
d. Fixed-rate loans are preferable when interest rates are expected to fall.
e. The interest rates on fixed-rate-loans have periodic adjustment dates, at which time monthly payments are
adjusted.
26. _____ loans do not have to be repaid until after you graduate from college.
a. Direct and Perkins
b. Direct and Parent Loans for Undergraduate Students (PLUS)
c. Perkins and Parent Loans for Undergraduate Students (PLUS)
d. Only Direct
e. Only Perkins
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27. A(n) _____ loan is repaid in a series of fixed, scheduled payments rather than in a lump sum.
a. interim
b. single-payment
c. installment
d. standard
e. consolidated
28. 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:
a. collateral note.
b. interim financing.
c. cumulative borrowing.
d. loan rollover.
e. loan extension.
29. 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.
a. a liability
b. collateral
c. debt
d. insurance
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e. corporate deposit
30. Sales finance companies:
a. buy installment loans from consumers.
b. buy installment loans from retailers.
c. sell installment loans to retailers.
d. buy installment loans from banks.
e. sell installment loans to banks.
31. Consumer finance companies:
a. charge rates that are regulated by the states where they do business.
b. are cooperative financial institutions that are owned by their members.
c. are non-profit financial institutions.
d. accept deposits from their members and use the deposits for lending.
e. are managed by large manufacturing companies.
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32. Commercial banks are able to charge lower interest rates than other lending institutions because:
a. they make shorter-term loans.
b. they usually take only the best credit risks.
c. their depositors require higher rates.
d. they get their funds from the money market.
e. they make only secured loans.
33. Credit unions lend money to qualified people who are their:
a. employees.
b. members.
c. suppliers.
d. policyholders.
e. stockholders.
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34. Most loans made by savings and loan associations are:
a. home improvement loans.
b. auto loans.
c. mortgage loans.
d. education loans.
e. consolidation loans.
35. Which of the following is a nondepository institution?
a. A commercial bank
b. A credit union
c. A consumer finance company
d. A savings and loan association
e. A savings bank
36. Which of the following sources of consumer loans often has the most favorable terms for borrowers?
a. Commercial banks
b. Credit unions
c. Consumer finance companies
d. Savings and loan associations
e. Asset management companies
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37. Which of the following statements regarding consumer finance companies is true?
a. Consumer finance companies accept deposits and give small loans to their members.
b. Consumer finance companies make loans of any size to low-risk borrowers.
c. Consumer finance companies offer consumer loans at the lowest interest rates.
d. Consumer finance companies offer consumer loans only for home mortgage lending.
e. Consumer finance companies make secured and unsecured loans to qualified individuals.
38. Which of the following statements regarding credit unions is true?
a. They make secured loans only to non-members.
b. They are owned and managed by the government.
c. They provide installment loans to their members.
d. They charge higher interest rates than other sources of consumer loans.
e. They are profit-making organizations.
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39. Which of the following statements regarding loan maturity is true?
a. The longer the loan maturity, the higher the amount of interest paid.
b. The shorter the loan maturity, the higher the total cost of borrowing.
c. The longer the loan maturity, the higher the monthly payments.
d. The shorter the loan maturity, the lower the monthly payments.
e. The longer the loan maturity, the lower the total cost of borrowing.
40. Jenny’s monthly take-home pay is $5,000, and her total monthly payments are $1,000. Which of the following is
Jenny’s debt safety ratio?
a. 10%
b. 5%
c. 20%
d. 35%
e. 40%