AFIP Credit and Lending Fundamentals Flashcards

What does the term 'credit score' primarily measure in the context of consumer lending?

Answer: A borrower's likelihood of repaying debt on time

A credit score measures the statistical likelihood that a borrower will repay debt obligations on time based on credit history.

Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers before finalizing a loan?

Answer: Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) mandates that lenders disclose the APR and other loan terms to borrowers prior to consummating a credit transaction.

In auto financing, what is the primary difference between a secured loan and an unsecured loan?

Answer: Secured loans have lower interest rates because collateral backs the debt

Secured loans use collateral (such as the vehicle itself) to back the debt, reducing lender risk and typically resulting in lower interest rates.

What does 'debt-to-income ratio' (DTI) represent in the lending qualification process?

Answer: Monthly debt payments divided by gross monthly income

DTI is calculated by dividing a borrower's total monthly debt payments by their gross monthly income, helping lenders assess repayment capacity.

Which credit bureau scoring model is most commonly used by auto lenders and finance companies in the United States?

Answer: FICO Score

The FICO Score is the most widely used credit scoring model in the United States, with auto lenders frequently using industry-specific FICO Auto Score versions.

In dealership finance, what is a 'reserve' in the context of F&I (Finance and Insurance)?

Answer: The difference between the buy rate and the sell rate on a loan

In F&I, dealer reserve is the markup between the interest rate a lender offers (buy rate) and the rate charged to the customer (sell rate), representing dealer compensation.