Loans Auto Loans 2 — Questions and Answers
Question 1: What is a 'captive auto lender'?
- A lender that only approves borrowers with perfect credit
- A financing company owned by or exclusively partnered with an auto manufacturer (Correct answer)
- A credit union that specializes in auto loans only
- A lender that requires borrowers to use a specific auto insurer
Correct answer: A financing company owned by or exclusively partnered with an auto manufacturer
A captive lender, such as Toyota Financial Services or Ford Motor Credit, is directly affiliated with an auto manufacturer and primarily finances that brand's vehicles.
Question 2: Being 'upside down' on an auto loan means:
- The loan interest rate has increased
- The borrower owes more than the car is currently worth (Correct answer)
- The lender has repossessed the vehicle
- The loan term has been extended without consent
Correct answer: The borrower owes more than the car is currently worth
Being upside down (or underwater) means the outstanding loan balance exceeds the vehicle's current market value, creating negative equity.
Question 3: Which of the following documents does a lender place on a vehicle to secure an auto loan?
- Deed of trust
- Lien on the vehicle title (Correct answer)
- Promissory note only
- Bill of sale
Correct answer: Lien on the vehicle title
The lender places a lien on the vehicle's title, giving them a legal claim to the car until the loan is fully repaid.
Question 4: What is the typical maximum auto loan term offered by most US lenders today?
- 36 months
- 48 months
- 60 months
- 84 months (Correct answer)
Correct answer: 84 months
Many US lenders now offer auto loan terms up to 84 months (7 years), though longer terms increase total interest paid and the risk of being upside down.
Question 5: How does depreciation impact auto loan risk for a lender?
- Depreciation has no impact on lender risk
- Rapid depreciation increases the chance a borrower will be upside down, raising default risk (Correct answer)
- Depreciation lowers the APR over time
- Depreciation only affects the borrower's insurance premiums
Correct answer: Rapid depreciation increases the chance a borrower will be upside down, raising default risk
As a vehicle depreciates quickly, the loan balance can exceed the car's value, meaning the lender may not recover the full loan amount if the borrower defaults.
Question 6: When refinancing an auto loan, what is the primary benefit a borrower typically seeks?
- Changing the vehicle registered under the loan
- Obtaining a lower interest rate to reduce monthly payments or total cost (Correct answer)
- Removing the lien from the title immediately
- Extending the loan term to avoid the down payment
Correct answer: Obtaining a lower interest rate to reduce monthly payments or total cost
Borrowers refinance auto loans primarily to secure a lower interest rate, which reduces monthly payments and/or the total interest paid over the life of the loan.
Loans Auto Loans 2
What is a 'captive auto lender'?