#1
Which of the following is an example of secured debt?
Mortgage
ExplanationSecured debt is backed by collateral, such as a home in the case of a mortgage.
#2
What is the primary difference between fixed-rate and variable-rate interest loans?
The interest rate
ExplanationFixed-rate loans maintain a constant interest rate, while variable-rate loans fluctuate based on market conditions.
#3
Which of the following is an example of unsecured debt?
Personal line of credit
ExplanationUnsecured debt doesn't require collateral, such as credit card debt or personal lines of credit.
#4
What is the purpose of a grace period in loan agreements?
To delay the start of repayment
ExplanationA grace period allows borrowers a temporary reprieve from making payments after taking out a loan.
#5
What is the difference between simple interest and compound interest?
Simple interest is calculated on the principal only, while compound interest is calculated on both the principal and accumulated interest.
ExplanationSimple interest is linear, while compound interest grows exponentially over time.
#6
Which of the following loans typically has the lowest interest rate?
Home mortgage loan
ExplanationHome mortgage loans often have lower interest rates due to the collateral provided by the property.
#7
Which of the following accurately describes compound interest?
Interest calculated on both the initial principal and the accumulated interest
ExplanationCompound interest grows not only on the principal amount but also on the interest accumulated over time.
#8
What does 'APR' stand for in the context of loans?
Annual Percentage Rate
ExplanationAPR represents the annual cost of borrowing, including interest and fees, expressed as a percentage.
#9
Which of the following factors typically influences the interest rate on a loan?
Loan amount
ExplanationThe loan amount, along with factors like credit score and loan term, can influence the interest rate offered by lenders.
#10
What does 'debt-to-income ratio' measure?
The amount of debt compared to the borrower's income
ExplanationDebt-to-income ratio calculates the proportion of a borrower's monthly debt payments to their gross monthly income.
#11
What is the 'prime rate' in the context of loans?
The benchmark interest rate used by banks to set interest rates for borrowers
ExplanationThe prime rate serves as the baseline for interest rates offered to borrowers, set by central banks.
#12
What is a 'prepayment penalty'?
A fee charged for paying off a loan early
ExplanationLenders impose prepayment penalties to compensate for interest income lost when loans are paid off ahead of schedule.
#13
What is the main risk associated with taking on variable-rate debt?
Fluctuating monthly payments
ExplanationVariable-rate debt can lead to unpredictable monthly payments due to changes in interest rates.
#14
In which scenario would a balloon payment be required?
At the end of the loan term
ExplanationA balloon payment is a large, final payment due at the end of a loan term, often associated with certain types of mortgages.
#15
What is the difference between a secured loan and an unsecured loan?
A secured loan requires collateral, while an unsecured loan does not require collateral.
ExplanationSecured loans are backed by assets, while unsecured loans rely solely on the borrower's creditworthiness.
#16
What is the primary benefit of refinancing a loan?
Lowering monthly payments or reducing the total interest paid over the life of the loan
ExplanationRefinancing can save money by securing a lower interest rate, extending the loan term, or altering the loan structure.
#17
What is the primary purpose of debt consolidation?
To simplify debt repayment by combining multiple debts into a single loan with a lower interest rate
ExplanationDebt consolidation streamlines repayment efforts and may reduce overall interest expenses by consolidating debts into one manageable payment.