Loans Loan Repayment 4 — Questions and Answers
Question 1: What is the debt avalanche repayment strategy?
- Paying off the smallest balance loan first regardless of interest rate
- Paying off the highest-interest-rate loan first to minimize total interest (Correct answer)
- Paying equal amounts to all loans simultaneously
- Consolidating all loans into one before making payments
Correct answer: Paying off the highest-interest-rate loan first to minimize total interest
The debt avalanche method targets the highest-APR debt first, which mathematically minimizes the total interest paid across all debts.
Question 2: What is the debt snowball repayment strategy?
- Paying the highest-balance loan first for maximum savings
- Paying the highest-interest loan first
- Paying the smallest-balance loan first to build psychological momentum (Correct answer)
- Splitting extra payments equally among all loans
Correct answer: Paying the smallest-balance loan first to build psychological momentum
The debt snowball method prioritizes smallest balances first; paying them off quickly provides motivational wins that help borrowers stay on track.
Question 3: What is capitalization of interest on a student loan?
- The lender reducing the principal at graduation
- Unpaid accrued interest being added to the principal balance, increasing the amount on which future interest is calculated (Correct answer)
- A government subsidy applied to the loan balance
- Interest that is permanently forgiven after deferment
Correct answer: Unpaid accrued interest being added to the principal balance, increasing the amount on which future interest is calculated
Capitalization adds accumulated unpaid interest to the principal, causing the borrower to pay interest on a larger balance going forward.
Question 4: Which type of mortgage repayment structure has payments that increase at set intervals, designed for borrowers expecting income growth?
- Graduated repayment mortgage (Correct answer)
- Balloon mortgage
- Reverse mortgage
- Interest-only mortgage
Correct answer: Graduated repayment mortgage
A graduated repayment mortgage starts with lower payments that step up over time, aligned with the expectation of rising borrower income.
Question 5: What is a balloon payment in a loan context?
- A small extra fee added to each monthly payment
- A large lump-sum payment due at the end of a loan term after smaller periodic payments (Correct answer)
- A penalty for paying off a loan early
- Monthly payments that decrease over time
Correct answer: A large lump-sum payment due at the end of a loan term after smaller periodic payments
Balloon loans require smaller regular payments followed by one large final payment (the balloon) that covers the remaining principal.
Question 6: Under Public Service Loan Forgiveness (PSLF), borrowers may have remaining federal student loan balances forgiven after:
- 5 years of service and 60 qualifying payments
- 10 years of service and 120 qualifying payments (Correct answer)
- 20 years regardless of employer type
- 25 years of IDR payments
Correct answer: 10 years of service and 120 qualifying payments
PSLF requires 120 qualifying monthly payments while working full-time for an eligible public service employer before forgiveness is granted.
Question 7: If a co-signer is added to a personal loan, what is their repayment obligation?
- They are responsible only if the primary borrower misses more than 3 payments
- They share equal responsibility for full repayment if the primary borrower defaults (Correct answer)
- They are liable only for half the remaining balance
- They have no repayment obligation; they only boost the credit application
Correct answer: They share equal responsibility for full repayment if the primary borrower defaults
A co-signer is equally legally obligated to repay the entire loan balance if the primary borrower fails to make payments.
Loans Loan Repayment 4
What is the debt avalanche repayment strategy?