#1
What is an example of a secured loan?
Mortgage loan
ExplanationSecured by property to minimize risk for the lender.
#2
What is the primary function of a credit score?
To assess the borrower's creditworthiness
ExplanationDetermines the likelihood of timely loan repayments.
#3
What is the term used for the fee charged by a lender for processing a loan application?
Origination fee
ExplanationCost associated with setting up a loan.
#4
What is 'amortization' in the context of loans?
The process of reducing a loan balance through regular payments
ExplanationGradual repayment of loan principal and interest over time.
#5
What is 'default' in the context of borrowing?
The situation where the borrower fails to fulfill their loan obligations
ExplanationFailure to meet agreed-upon loan terms.
#6
What is the term used for the interest rate that a bank charges its most creditworthy customers?
Prime rate
ExplanationBenchmark rate for lending to low-risk borrowers.
#7
What is the 'loan-to-value' ratio (LTV) in lending?
Ratio of loan amount to property value
ExplanationIndicates the proportion of property value financed.
#8
What is the difference between simple interest and compound interest?
Simple interest is calculated on the principal amount only, while compound interest is calculated on both the principal and accumulated interest.
ExplanationSimple interest accrues only on the initial amount, whereas compound interest includes previous interest.
#9
What is a 'cosigner' in a loan agreement?
A person who guarantees the loan and agrees to pay it if the borrower defaults
ExplanationSecondary party ensuring loan repayment if the borrower fails.
#10
What is the significance of the debt-to-income ratio (DTI) in lending?
It measures the borrower's ability to repay the loan by comparing their income to their debt obligations.
ExplanationAssesses the borrower's financial capacity to handle additional debt.
#11
What is adverse selection in the context of lending?
The tendency for high-risk borrowers to be more likely to seek loans
ExplanationHigh-risk borrowers are disproportionately attracted to borrowing.