Loans Loan Repayment 2 — Questions and Answers
Question 1: What is an amortization schedule?
- A penalty for early payoff
- A table showing each payment's split between principal and interest over the loan term (Correct answer)
- A government repayment assistance program
- A lender's fee schedule
Correct answer: A table showing each payment's split between principal and interest over the loan term
An amortization schedule breaks down each periodic payment into its principal and interest components across the loan's life.
Question 2: In the early months of a 30-year fixed mortgage, most of your monthly payment goes toward:
- Principal reduction
- Escrow reserves
- Interest charges (Correct answer)
- PMI premiums
Correct answer: Interest charges
Front-loaded amortization means early payments are mostly interest; the principal share grows gradually over time.
Question 3: What happens to your loan balance if you make only the minimum payment on a negatively amortizing loan?
- It stays the same
- It decreases slowly
- It increases because unpaid interest is added (Correct answer)
- It is forgiven after 10 years
Correct answer: It increases because unpaid interest is added
Negative amortization occurs when minimum payments don't cover accrued interest, causing the outstanding balance to grow.
Question 4: Which repayment strategy saves the most total interest on a fixed-rate loan?
- Making only minimum payments
- Paying biweekly instead of monthly (Correct answer)
- Extending the loan term
- Deferring the first payment
Correct answer: Paying biweekly instead of monthly
Biweekly payments result in one extra full payment per year, reducing principal faster and saving significant interest.
Question 5: A borrower has a $500/month required payment but pays $700/month. How should the extra $200 be applied?
- It is returned to the borrower
- It should be applied to principal reduction (Correct answer)
- It is held in suspense until the next due date
- It pays future months' interest first
Correct answer: It should be applied to principal reduction
Extra payments above the minimum should be directed to principal, which reduces the balance faster and cuts total interest paid.
Question 6: What is a prepayment penalty?
- A fee charged when a borrower pays off their loan early (Correct answer)
- Interest owed on late payments
- A surcharge for refinancing with the same lender
- A government tax on large loan payoffs
Correct answer: A fee charged when a borrower pays off their loan early
Some lenders charge a prepayment penalty to recoup expected interest income lost when a loan is paid off ahead of schedule.
Question 7: Under a standard 10-year federal student loan repayment plan, monthly payments are calculated to do what?
- Cover only accruing interest for the first 5 years
- Pay off the full loan in 120 equal monthly installments (Correct answer)
- Adjust annually based on the borrower's income
- Match the borrower's discretionary income
Correct answer: Pay off the full loan in 120 equal monthly installments
The Standard Repayment Plan divides the total loan balance plus interest into 120 fixed monthly payments over 10 years.
Loans Loan Repayment 2
What is an amortization schedule?