#1
Which of the following best describes loan repayment?
Paying back borrowed money over time, including interest and fees.
ExplanationLoan repayment involves returning borrowed funds along with accrued interest and fees over a specified period.
#2
What is the purpose of finance charges?
To cover the cost of providing credit.
ExplanationFinance charges are applied to cover the expenses associated with extending credit to borrowers.
#3
Which of the following is NOT a type of finance charge?
Principal amount
ExplanationPrincipal amount is not considered a finance charge; it is the initial borrowed sum.
#4
What happens if you miss a loan repayment?
You may incur late fees and damage your credit score.
ExplanationMissing a loan repayment can lead to financial penalties and negatively impact your credit rating.
#5
What is the grace period in loan repayment?
A period after the due date during which borrowers can still make payments without penalty.
ExplanationThe grace period is a window after the payment due date where borrowers can settle their dues without facing additional charges.
#6
How do fixed-rate loans differ from variable-rate loans?
Fixed-rate loans have a constant interest rate, while variable-rate loans can change over time.
ExplanationFixed-rate loans maintain a steady interest rate throughout the loan term, whereas variable-rate loans may see fluctuations in interest rates.
#7
What is the difference between a secured loan and an unsecured loan?
A secured loan requires collateral, while an unsecured loan does not.
ExplanationSecured loans necessitate assets as security, whereas unsecured loans do not require collateral.
#8
How does the interest rate affect loan repayment?
Lower interest rates mean lower total loan costs.
ExplanationLower interest rates reduce the overall expense of the loan, resulting in decreased repayment amounts.
#9
What is the purpose of an amortization schedule?
To track loan repayment over time, showing the allocation of payments between principal and interest.
ExplanationAn amortization schedule outlines the repayment plan for a loan, illustrating how payments are split between reducing the principal balance and covering interest.
#10
What is the difference between simple interest and compound interest?
Simple interest is only applied to the principal amount, while compound interest is applied to both the principal and accumulated interest.
ExplanationSimple interest accrues solely on the initial loan amount, whereas compound interest accrues on both the principal and previously accumulated interest.
#11
How do early repayments affect the total cost of a loan?
Early repayments decrease the total cost of the loan.
ExplanationMaking early repayments reduces the overall expense of the loan, potentially saving the borrower money on interest.
#12
What is negative amortization?
When the loan balance increases over time.
ExplanationNegative amortization occurs when loan payments are insufficient to cover accruing interest, causing the loan balance to rise instead of decrease.