Understanding Credit and Interest Calculation Quiz

Principal amount is the original sum of money borrowed in a loan.

Interest on a loan is usually calculated using both the principal amount and the interest rate.

APR represents the total cost of borrowing over a year, including interest and fees.

Grace period is the time during which no interest is charged on credit card balances, typically if the full balance is paid by the due date.

A higher credit score is associated with lower perceived risk by lenders, leading to lower interest rates on loans.

DTI assesses how much of an individual's income goes towards debt payments, indicating their ability to manage additional debt.

The interest rate on a variable-rate mortgage fluctuates over time, typically in response to changes in the market interest rates.

Making only minimum payments on a credit card increases the time to repay debt and accumulates more interest.

Fixed interest rates stay constant throughout the loan term, while variable rates fluctuate based on market conditions.

A cosigner on a loan provides a guarantee of repayment in case the primary borrower defaults on the loan.

Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and any accrued interest.

Extending the duration of a loan increases the total amount of interest paid over time.

Prepayment penalties impose additional fees if a loan is paid off before its specified term, increasing the overall cost of repayment.