Chapter 7—Using Consumer Loans
1. Even if you do have money, you may still be better off using an installment loan for a big-ticket purchase.
a. True
b. False
2. Consumer loans, like open account credit, result from a rather informal process.
a. True
b. False
3. Loans against a life insurance policy do not have to be paid back.
a. True
b. False
4. The most common use of consumer loans is to purchase automobiles.
a. True
b. False
Chapter 7—Using Consumer Loans
5. From a financial planning perspective when considering a consumer loan, you should ask yourself how the purchase
fits into long-term financial plans.
a. True
b. False
6. When you take out a loan against the cash value of your life insurance policy, you’re really borrowing from yourself.
a. True
b. False
7. Collateral is an item of value used to secure the principal portion of a loan.
a. True
b. False
8. The cash value of a life insurance policy can be used as a source of loan collateral.
a. True
b. False
Chapter 7—Using Consumer Loans
9. Consolidation loans are used to purchase new furniture and appliances when many items are needed at the same time.
a. True
b. False
10. Consolidation loans are often used to help borrowers straighten out a critical financial situation.
a. True
b. False
11. Borrowing to pay for a college education is a legitimate use of credit.
a. True
b. False
12. College costs have been escalating faster than the overall rate of inflation.
a. True
b. False
Chapter 7—Using Consumer Loans
13. College costs have been escalating, but not as rapidly as the overall rate of inflation.
a. True
b. False
14. The student loans with the lowest rates of interest and the best loan terms are the PLUS loans.
a. True
b. False
15. The student loans with the best loan terms are the Stafford and Perkins loans.
a. True
b. False
16. PLUS loans are made to parents or legal guardians rather than to the student.
a. True
b. False
Chapter 7—Using Consumer Loans
17. Student loans are made by banks and other financial institutions, but students apply for these loans through their
universities.
a. True
b. False
18. In order to continue receiving student loans, the student must be making satisfactory progress in his academic
program.
a. True
b. False
19. 529 Plans are the newest type of student loans.
a. True
b. False
Chapter 7—Using Consumer Loans
20. Student loans are not dischargeable in Chapter 13 bankruptcy proceedings.
a. True
b. False
21. Earnings on 529 college savings plans can be tax free when used for qualifying college education expenses.
a. True
b. False
22. Student loans are dischargeable in Chapter 7 bankruptcy proceedings.
a. True
b. False
23. Single-payment loans are often used as a form of interim financing.
a. True
b. False
Chapter 7—Using Consumer Loans
24. Installment loans are typically repaid in one payment.
a. True
b. False
25. Installment loans are typically repaid in monthly payments.
a. True
b. False
26. The repayment period on most installment loans is six to twelve months.
a. True
b. False
27. The majority of consumer loans are set up with fixed interest rates.
a. True
b. False
Chapter 7—Using Consumer Loans
28. When the market interest rate goes up, the rate on variable-rate loans goes up.
a. True
b. False
29. Variable-rate loans are desirable if interest rates are expected to fall in the future.
a. True
b. False
30. The lender can adjust the rate on variable-rate loans only on prespecified adjustment dates.
a. True
b. False
31. Commercial banks are generally more selective in granting loans than finance companies.
a. True
b. False
Chapter 7—Using Consumer Loans
32. Credit unions dominate the consumer loan market.
a. True
b. False
33. Savings and loan associations dominate the consumer loan market.
a. True
b. False
34. Consumer finance companies usually charge lower rates of interest than commercial banks.
a. True
b. False
35. Most loans made by consumer finance companies are for larger amounts and are made to low-risk borrowers.
a. True
b. False
Chapter 7—Using Consumer Loans
36. Credit unions grant loans only to members of the credit union.
a. True
b. False
37. Credit unions offer some of the most attractive loan terms available.
a. True
b. False
38. The primary type of loan made by a savings and loan association is the long-term installment loan used for the
purchase of a home.
a. True
b. False
39. S&L associations are not allowed to make loans for things like cars, televisions, and appliances.
Chapter 7—Using Consumer Loans
a. True
b. False
40. Sales finance companies commonly purchase the retail installment contracts of businesses that sell big-ticket items
such as automobiles, furniture, and appliances.
a. True
b. False
41. GMAC is an example of a captive finance company.
a. True
b. False
42. Cash value loans are available from all types of life insurance policies.
a. True
b. False
Chapter 7—Using Consumer Loans
43. The interest rate on a loan against your life insurance policy is set at the time the policy is taken out.
a. True
b. False
44. Life insurance loans could involve a tax penalty if certain conditions are not met.
a. True
b. False
45. Because no written contract is usually required, borrowing from friends and relatives is advisable.
a. True
b. False
46. When loaning money to a friend or family member, it is advisable to lend only the amount that you can afford to give
away.
a. True
b. False
Chapter 7—Using Consumer Loans
47. When comparing two installment loans with the same principal and APR, the loan with the longer maturity will have
the lower monthly payment and the higher total costs.
a. True
b. False
48. When comparing two installment loans with the same principal and APR, the loan with the shorter maturity will have
the lower monthly payment and the lower total costs.
a. True
b. False
49. It is becoming increasingly frequent for longer-term installment loans to carry variable interest rates.
a. True
b. False
50. Generally speaking, variable-rate loans are desirable to the consumer if interest rates are expected to increase over the
course of the loan.
a. True
b. False
Chapter 7—Using Consumer Loans
51. Given the choice, it is almost always better to accept a rebate rather than 0 percent APR on an auto loan.
a. True
b. False
52. If a loan has a prepayment penalty, there will be an additional cost to repay the loan early.
a. True
b. False
53. A chattel mortgage is a legal claim that gives lenders the right to liquidate specific personal property to satisfy their
claims in the event of default.
a. True
b. False
Chapter 7—Using Consumer Loans
54. When simple interest is used, the stated rate of interest on single payment loans is equal to the annual percentage rate
(APR).
a. True
b. False
55. With the discount method, the finance charges are calculated and then added to the amount borrowed.
a. True
b. False
56. Simple interest on an installment loan is calculated as Amount of Loan × Interest Rate × Term of Loan.
a. True
b. False
57. The add-on method is less expensive than the simple interest method when stated rates of interest are identical.
a. True
b. False
Chapter 7—Using Consumer Loans
58. If the add-on method is used to calculate a finance charge of $150.80 on a $2,200 loan, the amount to be repaid is
$2,200.
a. True
b. False
59. If the add-on method is used to calculate a finance charge of $100.80 on a $1,800 loan, the amount to be repaid is
$1,900.80.
a. True
b. False
60. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be disbursed to
the borrower is $2,400.
a. True
b. False
61. If the discount method is used to calculate a finance charge of $250.60 on a $2,400 loan, the amount to be repaid is
$2,400.
a. True
b. False
Chapter 7—Using Consumer Loans
62. The most accurate method currently available for calculating the annual percentage rate (APR) on an add-on loan is
the Rule of 78.
a. True
b. False
63. If a 12-month installment loan is prepaid at the end of 6 months, one-half of the interest would be saved.
a. True
b. False
64. The purchase of credit life insurance is highly recommended by most financial planning experts.
a. True
b. False
65. The average annual cost of a college education at a state school is about $33,000.
a. True
Chapter 7—Using Consumer Loans
b. False
66. About one in three student borrowers have a past due balance.
a. True
b. False
67. Long-term financial goals often depend on borrowing funds. The type of loan that generally does not fulfill the long-
term goal achievement is ____ loans.
a. consumer
b. installment
c. automobile
d. mortgage
e. single-payment
68. A characteristic of consumer loans is that they
a. include a negotiated contract.
b. are arrived at through a formal process.
c. include a repayment schedule.
d. are used to purchase big-ticket durable goods and other items.
e. are all of these.
Chapter 7—Using Consumer Loans
69. A consumer loan probably would not be used to
a. purchase an auto.
b. pay for college tuition.
c. consolidate several loans into one.
d. finance a special vacation.
e. buy back-to–school clothes.
70. The most popular use of consumer loans is to
a. purchase a car.
b. finance a college education.
c. finance a vacation.
d. buy a house.
e. buy furniture.
71. Consumers whose debt burden has become very heavy might apply for a(n)
a. personal loan.
b. single payment loan.
c. buy-down loan.
d. consolidation loan.
e. interim financing.
Chapter 7—Using Consumer Loans
72. To qualify for a Stafford loan, you must
a. demonstrate financial need.
b. have a good credit rating.
c. make satisfactory academic progress.
d. all of the above
e. a and c only
73. To qualify for a Perkins loan, you must
a. demonstrate financial need.
b. visit the financial institution.
c. apply through your parents.
d. all of the above
e. a and c only
74. Regarding student loans, which of the following is not true?
a. They are available for both undergraduate and graduate students.
b. Applications can be filled out on the Internet.
c. There is no limit on how much can be borrowed with each loan.
d. There is no limit on the number of loans one can have.
e. Interest may be tax deductible.