CCDS Consumer Debt Products & Interest Calculations 1 — Questions and Answers
Question 1: A credit card has a nominal annual interest rate of 24%. What is the approximate monthly periodic rate used to calculate finance charges?
- 1%
- 2% (Correct answer)
- 3%
- 4%
Correct answer: 2%
The monthly periodic rate is the annual rate divided by 12; 24% ÷ 12 = 2% per month.
Question 2: Which type of consumer debt is typically classified as 'unsecured'?
- Auto loan
- Home equity loan
- Credit card balance (Correct answer)
- First mortgage
Correct answer: Credit card balance
Credit card balances are unsecured because no specific collateral backs the debt.
Question 3: The Annual Percentage Rate (APR) on a loan differs from the stated interest rate because APR:
- Excludes compounding effects
- Includes fees and costs of the loan (Correct answer)
- Only applies to fixed-rate loans
- Is always lower than the stated rate
Correct answer: Includes fees and costs of the loan
APR reflects the true cost of borrowing by incorporating both interest and required fees, giving a standardized comparison metric.
Question 4: A consumer borrows $5,000 at 10% simple interest for 2 years. How much total interest will be paid?
- $500
- $1,000 (Correct answer)
- $1,050
- $1,100
Correct answer: $1,000
Simple interest = Principal × Rate × Time = $5,000 × 0.10 × 2 = $1,000.
Question 5: Which repayment structure requires equal monthly payments covering both principal and interest, with interest portion decreasing over time?
- Balloon payment
- Interest-only
- Amortizing installment (Correct answer)
- Revolving credit
Correct answer: Amortizing installment
An amortizing installment loan schedules fixed payments where the interest share shrinks and the principal share grows each month.
Question 6: A payday loan charges $15 per $100 borrowed for a 14-day term. What is the approximate APR?
- 15%
- 36%
- 130%
- 391% (Correct answer)
Correct answer: 391%
APR ≈ (Fee/Principal) × (365/Days) × 100 = ($15/$100) × (365/14) × 100 ≈ 391%.
Question 7: Which feature distinguishes revolving credit from installment credit?
- Revolving credit has a fixed repayment schedule
- Revolving credit allows repeated borrowing up to a set limit (Correct answer)
- Installment credit has no set end date
- Installment credit requires no collateral
Correct answer: Revolving credit allows repeated borrowing up to a set limit
Revolving credit lets the borrower repeatedly draw funds up to a credit limit as balances are repaid, unlike installment loans with fixed terms.
CCDS Consumer Debt Products & Interest Calculations 1
A credit card has a nominal annual interest rate of 24%.
What is the approximate monthly periodic rate used to calculate finance charges?