Loans Personal Loans 1 — Questions and Answers
Question 1: What is the primary difference between a secured personal loan and an unsecured personal loan?
- Secured loans require collateral; unsecured loans do not (Correct answer)
- Secured loans have higher interest rates
- Unsecured loans have longer repayment terms
- Secured loans are only for business use
Correct answer: Secured loans require collateral; unsecured loans do not
Secured personal loans require the borrower to pledge an asset as collateral, while unsecured loans are approved based solely on creditworthiness.
Question 2: Which credit score range is generally considered 'good' and may qualify a borrower for competitive personal loan rates in the US?
- 580–619
- 620–659
- 670–739 (Correct answer)
- 500–579
Correct answer: 670–739
A FICO score of 670–739 is generally classified as 'good' and typically qualifies borrowers for competitive interest rates.
Question 3: What does APR stand for in the context of personal loans?
- Annual Payment Rate
- Annual Percentage Rate (Correct answer)
- Adjusted Principal Rate
- Authorized Premium Rate
Correct answer: Annual Percentage Rate
APR stands for Annual Percentage Rate and represents the yearly cost of borrowing, including interest and fees.
Question 4: A personal loan origination fee is typically charged to cover which of the following?
- Late payment penalties
- The lender's cost of processing the loan (Correct answer)
- Insurance premiums on the loan
- Early payoff penalties
Correct answer: The lender's cost of processing the loan
An origination fee is a one-time charge by the lender to process and fund the personal loan.
Question 5: When a borrower's debt-to-income (DTI) ratio is 45%, what does that indicate?
- 45% of income goes to savings
- 45% of gross monthly income goes toward debt payments (Correct answer)
- The borrower has 45% equity in an asset
- The borrower's loan-to-value ratio is 45%
Correct answer: 45% of gross monthly income goes toward debt payments
A DTI of 45% means 45% of the borrower's gross monthly income is used to pay existing debt obligations.
Question 6: Which federal law requires lenders to disclose the APR, total finance charge, and payment schedule to personal loan applicants?
- Fair Credit Reporting Act (FCRA)
- Truth in Lending Act (TILA) (Correct answer)
- Equal Credit Opportunity Act (ECOA)
- Fair Debt Collection Practices Act (FDCPA)
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) mandates that lenders provide clear disclosure of loan terms, including APR and total finance charges.
Loans Personal Loans 1
What is the primary difference between a secured personal loan and an unsecured personal loan?