Loans Personal Loans 2 — Questions and Answers
Question 1: What is a prepayment penalty on a personal loan?
- A fee for making the first payment late
- A fee charged for paying off the loan early (Correct answer)
- An extra charge added to each monthly payment
- A penalty for applying with multiple lenders
Correct answer: A fee charged for paying off the loan early
A prepayment penalty is a fee some lenders charge if a borrower pays off the loan balance before the scheduled end of the term.
Question 2: Which type of personal loan is typically used to consolidate high-interest credit card debt?
- Auto loan
- Payday loan
- Debt consolidation loan (Correct answer)
- Title loan
Correct answer: Debt consolidation loan
A debt consolidation loan combines multiple high-interest debts into a single personal loan, often at a lower interest rate.
Question 3: A 'hard inquiry' on a credit report occurs when:
- A borrower checks their own credit score
- A lender pulls credit for a formal loan application (Correct answer)
- A utility company verifies identity
- A borrower requests a credit freeze
Correct answer: A lender pulls credit for a formal loan application
A hard inquiry happens when a lender accesses your credit report as part of a formal credit application and can temporarily lower your credit score.
Question 4: What is the typical range of personal loan terms offered by US banks and credit unions?
- 1–3 months
- 6 months to 7 years (Correct answer)
- 10–30 years
- 1–2 years only
Correct answer: 6 months to 7 years
Personal loan terms in the US typically range from 6 months to 7 years depending on the lender and loan amount.
Question 5: Which of the following would most likely result in a higher interest rate on a personal loan?
- High credit score and low DTI
- Long employment history
- Low credit score and high DTI (Correct answer)
- Large existing savings balance
Correct answer: Low credit score and high DTI
A low credit score combined with a high debt-to-income ratio signals greater repayment risk, causing lenders to charge higher interest rates.
Question 6: Which institution is generally NOT a typical source for personal loans in the US?
- Credit unions
- Online fintech lenders
- The Federal Reserve (Correct answer)
- Commercial banks
Correct answer: The Federal Reserve
The Federal Reserve is the central bank and does not offer personal loans directly to consumers.
Loans Personal Loans 2
What is a prepayment penalty on a personal loan?