EBU 1063 Smart Money Management LECTURE 7:

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Questions and Answers

What is the main characteristic of a fixed-rate interest rate loan?

It can be converted to a variable-rate loan

The interest rate stays fixed for the entire duration of the loan (correct)

The interest rate varies based on the market interest rate

It is tied to market interest rates

What is the prime rate in the context of loans?

The interest rate that banks charge to their most creditworthy customers (correct)

The minimum interest rate set by the central bank

The standard interest rate for all types of loans

The maximum interest rate set by financial institutions

What does a shorter term loan typically result in?

Smaller monthly payments and higher interest rate

Higher interest rate and larger monthly payments (correct)

Lower interest rate and larger monthly payments

Smaller monthly payments and lower interest rate

What type of loan uses equity in a home as collateral?

Home equity loan or second mortgage Signup and view all the answers

What does APR stand for in the context of consumer loans?

Annual Percentage Rate Signup and view all the answers

Which source is considered as one of the most expensive for consumer loans?

Retail stores Signup and view all the answers

What is a key factor for getting the best rate on consumer loans?

Large down payment Signup and view all the answers

What is the advice regarding debt in relation to borrowing?

Borrow only if benefits outweigh costs Signup and view all the answers

What is the primary advantage of a home equity loan or second mortgage?

Low risk to lender because of collateral Signup and view all the answers

How does the repayment occur in installment loans?

Repayment of both interest and principal occurs at regular intervals. Signup and view all the answers

What is the primary difference between a single-payment loan and an installment loan?

Single-payment loans require repayment of both principal and interest at various intervals, while installment loans are paid back in a single lump-sum payment with interest at maturity. Signup and view all the answers

What is the main characteristic that distinguishes a secured loan from an unsecured loan?

Secured loans are guaranteed by an asset, while unsecured loans do not require any collateral. Signup and view all the answers

What is the key feature that distinguishes a variable-rate loan from a fixed-rate loan?

Variable-rate loans have a fluctuating interest rate, while fixed-rate loans have a constant interest rate. Signup and view all the answers

What is the purpose of loan amortization?

To decrease the interest portion covered in each loan payment and increase the principal portion covered. Signup and view all the answers

What should be considered when choosing an appropriate source for a consumer loan?

The borrower's credit score and financial history. Signup and view all the answers

What is one of the potential risks associated with borrowing through a variable-rate loan?

The interest rate may increase over time, resulting in higher loan repayments. Signup and view all the answers

Study Notes

Loan Characteristics

A fixed-rate interest rate loan has an interest rate that remains the same for the entire term of the loan.

Loan Concepts

The prime rate is the interest rate at which banks lend to their most creditworthy customers, used as a benchmark for other loan rates.

Loan Terms

A shorter term loan typically results in lower total interest paid over the life of the loan.

Home Loans

A home equity loan uses the equity in a home as collateral.

Loan Acronyms

APR stands for Annual Percentage Rate, a measure of the total cost of a loan, including fees and interest.

Loan Sources

Credit card debt is considered one of the most expensive sources for consumer loans.

Getting the Best Rate

Having a good credit score is a key factor in getting the best rate on consumer loans.

Debt Advice

One should avoid debt whenever possible, and borrow only when necessary.

Home Equity Loans

The primary advantage of a home equity loan or second mortgage is that it allows homeowners to tap into the equity in their home.

Loan Repayment

In installment loans, repayment occurs through a series of fixed payments over a set period of time.

Loan Types

The primary difference between a single-payment loan and an installment loan is that a single-payment loan requires repayment in full at maturity, while an installment loan allows for partial payments over time.

Secured vs. Unsecured Loans

A secured loan is distinguished by the use of collateral, which can be seized if the loan is not repaid, whereas an unsecured loan does not require collateral.

Variable-Rate Loans

A variable-rate loan is distinguished from a fixed-rate loan in that the interest rate can change over time.

Loan Amortization

The purpose of loan amortization is to provide a schedule for repaying a loan, typically through a series of fixed payments.

Choosing a Loan Source

When choosing an appropriate source for a consumer loan, one should consider factors such as interest rates, fees, and repayment terms.

Variable-Rate Loan Risks

One of the potential risks associated with borrowing through a variable-rate loan is that the interest rate may increase, resulting in higher payments.

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