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Basic Loans & Lending Practices MCQ

1. What is the definition of a loan?

A type of debt, the redistribution of assets between a borrower and a lender with a promise to repay

Something similar to an asset

Always a short term obligation to repay someone

The same as a draft or check

Answer

Correct Answer: A type of debt, the redistribution of assets between a borrower and a lender with a promise to repay

Note: This Question is unanswered, help us to find answer for this one

2. What would the entry be for a monthly interest payment on a long term loan?

Dr: Interest Expense, Cr: Cash

Dr: Cash, Cr: Interest Expense

Dr: Long Term Liability, Cr: Interest Expense

Dr: Interest Expense, Cr: Long Term Liability

Answer

Correct Answer: Dr: Interest Expense, Cr: Cash

Note: This Question is unanswered, help us to find answer for this one

3. Why would someone not use a credit card to purchase a car?

Credit limits on a credit card are not high enough to purchase a car

Car dealers force consumers to use loans

Interest rates on credit cards tend to be higher than on a loan for a car or a house

It is illegal to pay for a car using credit cards

Answer

Correct Answer: Interest rates on credit cards tend to be higher than on a loan for a car or a house

Note: This Question is unanswered, help us to find answer for this one

4. What is the collateral under a mortgage loan?

The family automobile

The borrower's job

All the borrower's cash in the bank

The house which the mortgage is used to purchase

Answer

Correct Answer: The house which the mortgage is used to purchase

Note: This Question is unanswered, help us to find answer for this one

5. How do lenders abuse people who are looking to get their homes refinanced?

They buy their homes from them

They refinance people for minimal interest rate improvements, while charging excessive fees for their services

They force them to take out home refinance loans against their will

They increase people's interest rates instead of lowering them

Answer

Correct Answer: They refinance people for minimal interest rate improvements, while charging excessive fees for their services

Note: This Question is unanswered, help us to find answer for this one

6. Why is the repayment of a loan not considered income to the lender?

Because it only converts assets from receivables into cash

Because the amount is too small to impact tax collections

Because it is too complicated to track

Because there is no set law about how to handle it

Answer

Correct Answer: Because it only converts assets from receivables into cash

Note: This Question is unanswered, help us to find answer for this one

7. What is a down payment?

Always 20% of the price of the house

Payment on a house required by law

The monthly mortgage payment

Money put down towards the payment of the house by the buyer at the time of purchase which is deducted from the price

Answer

Correct Answer: Money put down towards the payment of the house by the buyer at the time of purchase which is deducted from the price

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8. What does the term "Margin" mean?

The ratio of debt to equity

The claim a lender may place on property in return for making a loan

The amount the lender adds to the predetermined index rate of an Adjustable-Rate Loan to determine the new interest rate at each adjustment.

The borrowing of money<br>

Answer

Correct Answer: The amount the lender adds to the predetermined index rate of an Adjustable-Rate Loan to determine the new interest rate at each adjustment.

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9. What are low interest loans offered by schools to the neediest students called?

Fair Market Loans

Trustee Loans

Perkins Loans

Beneficiary Loans

Answer

Correct Answer: Perkins Loans

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10. What is a typical mortgage loan term?

30 years

10 years

2 years

100 years

Answer

Correct Answer: 30 years

Note: This Question is unanswered, help us to find answer for this one

11. Who is a mortgagee?

The borrower

The lending institution

The mortgage broker

The lender

Answer

Correct Answer: The lender

Note: This Question is unanswered, help us to find answer for this one

12. What does the term "Escrow" mean?

A sum a borrower pays to a lender to decrease the interest rate of a mortgage

The market value of a home

A neutral third party that carries out the instructions of both the buyer and the seller to handle all the paperwork of settlement or closing

The amount by which a home is overpriced above the market price

Answer

Correct Answer: A neutral third party that carries out the instructions of both the buyer and the seller to handle all the paperwork of settlement or closing

Note: This Question is unanswered, help us to find answer for this one

13. What would a company that wants to decrease their debt to equity ratio do?

Take out a new long term loan

Take out a new short term loan

Pay off a short term loan

Collect on receivables<br>

Answer

Correct Answer: Pay off a short term loan

Note: This Question is unanswered, help us to find answer for this one

14. What is something that has been made payable and is overdue and unpaid called?

Commission

Promissory note

Delinquent

Repossessed

Answer

Correct Answer: Delinquent

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15. What is a written document that transfers the title to personal property callled?

Bill of Sale

Bill of lading

Sales contract

Depreciation

Answer

Correct Answer: Bill of Sale

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16. How does a long term loan received in cash affect a firms quick ratio?

It is not possible to say anything on the basis of the information given

There will be no change

It will decrease

It will increase

Answer

Correct Answer: It will increase

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17. When does a mortgage payer have to pay a late payment penalty?

When the payment is late by 4 days

When the payment is late by15 days

When the payment is late by the number of days stipulated in the loan agreement

Never

Answer

Correct Answer: When the payment is late by the number of days stipulated in the loan agreement

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18. What is meant by the term "Assumption"?

Applying for a mortgage

A loan secured by the equity value in a borrower's home

The transfer of the seller's existing mortgage to the buyer

None of the above

Answer

Correct Answer: The transfer of the seller's existing mortgage to the buyer

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19. What is "Equity"?

The value of the assets inside the house

The total value of the house

The value of the house after loans are subtracted

The amount of the mortgage

Answer

Correct Answer: The value of the house after loans are subtracted

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20. What is a loan that has a fixed rate of interest over a period of time known as?

Coupon Payment Loan

Conforming Mortgage loan

Balloon Loan

Term Loan

Answer

Correct Answer: Balloon Loan

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21. What purpose does a title serve?

It is required by the mortgagee

It is the legal document showing the ownership of the property

It lists out the interest rate of the mortgage

None of the above

Answer

Correct Answer: It is the legal document showing the ownership of the property

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22. Why are "Pay Day Loans" considered predatory?

They target people with jobs

They are offered in stores

They charge interest rates lower than credit cards

They are short term loans with interest rates far higher than those on any standard loan and are typically aimed at the poor and/or the uneducated people

Answer

Correct Answer: They are short term loans with interest rates far higher than those on any standard loan and are typically aimed at the poor and/or the uneducated people

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23. How are borrowers affected by nonpayment of loans?

It helps bolster their credit report

They get a discount on future loans

They are offered additional credit by the lender

Their credit report begins to indicate late payments, reducing their ability to receive credit in the future

Answer

Correct Answer: Their credit report begins to indicate late payments, reducing their ability to receive credit in the future

Note: This Question is unanswered, help us to find answer for this one

24. Why have the lenders been restricting the issuance of credit cards in recent years?

Because consumer credit ratings have been going down rapidly

Because higher bankruptcy and non payment levels by consumers have been eating into the profit levels

Because consumers have nothing else to buy

Because there is a tendency among consumers to take out home loans instead

Answer

Correct Answer: Because higher bankruptcy and non payment levels by consumers have been eating into the profit levels

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25. What is a "custom loan repayment schedule"?

Payments which are large initially but become smaller over time

Paying interest only for several years, then increasing the payment to repay the principal as well

The making of the scheduled monthly payments to the lender by the borrower

One large payment at a predetermined time

Answer

Correct Answer: The making of the scheduled monthly payments to the lender by the borrower

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26. What typically happens if a borrower breaks one of the loan covenants?

Nothing

The loan becomes 'in default', and can be called by the lender

The borrower has to pay double the amount of the loan

The IRS will tax the borrower

Answer

Correct Answer: The loan becomes 'in default', and can be called by the lender

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27. Why can a borrower not deduct loan repayments from their income when calculating taxes?

Because there is no precedent allowing it

Because the lender will be deducting them on their side

Because they were not taxed on the proceeds of the loan, they can not deduct repayments either

Because it is unfair to the borrowers

Answer

Correct Answer: Because they were not taxed on the proceeds of the loan, they can not deduct repayments either

Note: This Question is unanswered, help us to find answer for this one

28. Why is interest paid by the borrower deductible on their tax return?

Because interest paid represents the cost of having a loan and is an expense to the borrower

Because it is revenue to the lender and should be income as well to the borrower

Because it is unfair for the borrower to have this deduction

Because the SEC requires it

Answer

Correct Answer: Because interest paid represents the cost of having a loan and is an expense to the borrower

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29. Which of the following is a reason for the proliferation of credit cards?

The government promotes the use of credit cards

It is healthy for people to spend beyond their means

People want to use them for vacations

It is easy to apply for and get a credit card

Answer

Correct Answer: It is easy to apply for and get a credit card

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30. What purpose do mortgage brokers serve?

They work for the bank and sell mortgages

They work for the borrowers, aggregating all loan options and provide the borrowers with options

They work for the real estate companies and sell property

They are the buyers of real estate

Answer

Correct Answer: They work for the borrowers, aggregating all loan options and provide the borrowers with options

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31. What is meant by the term "Recoverable Grants"?

Funds provided by a philanthropist to fulfill a role similar to equity

Interim financing for a home buyer

A short term loan used to pay closing costs

A bond that does not earn any interest

Answer

Correct Answer: Funds provided by a philanthropist to fulfill a role similar to equity

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32. What is the purpose of covenants?

They are required by law to be placed on all borrowers

To force a borrower to abide by rules which compel the borrower to stay in a situation where they can repay the loan

The IRS forces the lenders to place them on all commercial loans

To protect the borrower

Answer

Correct Answer: To force a borrower to abide by rules which compel the borrower to stay in a situation where they can repay the loan

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33. When can interest paid be deducted on a tax return?

In the year the loan was taken out

In the year the final payment on the loan is made

It is not allowed to be deducted at all

In the year the interest is paid

Answer

Correct Answer: In the year the interest is paid

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34. What is meant by the term "Floor"?

The minimum amount a loan can be made for

The interest rate below which the rate of an Adjustable-Rate Loan cannot be adjusted

The minimum amount of time a mortgage can be set for

A professional opinion of the current market value of a property

Answer

Correct Answer: The interest rate below which the rate of an Adjustable-Rate Loan cannot be adjusted

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35. What does the term "Collateral" mean?

Assets pledged to secure the repayment of a loan

The monthly payment of a loan

Only the principal portion of a loan

A situation where one fails to make a payment, which can lead to foreclosure

Answer

Correct Answer: Assets pledged to secure the repayment of a loan

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36. What is the short-term loan that provides temporary financing until more permanent financing is available called?

Interim Financing

Contingency

Overdraft

Mortgage Modification

Answer

Correct Answer: Interim Financing

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37. What does the term "Closing" mean?

The day a price is agreed on for a home transaction

The meeting where the buyers, sellers, and their representatives meet to finalize the legal exchange of property

The process of being approved for a mortgage

A legal document used to transfer the ownership of a property

Answer

Correct Answer: The meeting where the buyers, sellers, and their representatives meet to finalize the legal exchange of property

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38. How does the payment of a short term loan affect a companys balance sheet?

It reduces cash and short term liabilities

It reduces cash and increases short term liabilities

It decreases short term liabilities and increases long term liabilities

It has no impact

Answer

Correct Answer: It reduces cash and short term liabilities

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39. How would a 10 year loan show up on a company balance sheet?

As a short term liability

As a long term liability

As an asset

As revenue

Answer

Correct Answer: As a long term liability

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40. What is meant by Housing Expense Ratio?

The same as income to debt ratio

The percentage of living expenses to housing expenses

The percentage of monthly income that goes towards the housing payment

The ratio of the house price to those of other similar houses

Answer

Correct Answer: The percentage of monthly income that goes towards the housing payment

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41. What does the term "Flipping" denote?

A fee charged for the use of money

Buying expensive properties and renting them out

Buying undervalued properties and renting them out

The process of buying a property and then attempting to sell it relatively quickly for a profit

Answer

Correct Answer: The process of buying a property and then attempting to sell it relatively quickly for a profit

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42. What is meant by the term "Forbearance"?

A postponement of payment on a loan, typically if the borrower doesn't qualify for a deferment and is unable to make payments for a reason such as poor health

A step taken during bankruptcy

An extra loan payment made to pay down principal

None of the above

Answer

Correct Answer: A postponement of payment on a loan, typically if the borrower doesn't qualify for a deferment and is unable to make payments for a reason such as poor health

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43. What does the term "Escrow Payment" mean?

The placing of funds in a special account to cover regular payment of taxes and insurance

The fee charged for borrowing money

An additional payment made to reduce the principal balance of a mortgage

The final payment made to pay off a mortgage

Answer

Correct Answer: The placing of funds in a special account to cover regular payment of taxes and insurance

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44. What is meant by a secured credit card?

An open line of credit

A credit card with a fixed monthly amount of payment

A credit card by someone other than a major bank

A credit card to get which a deposit account must be established; often 100% of the available credit is required as a deposit

Answer

Correct Answer: A credit card to get which a deposit account must be established; often 100% of the available credit is required as a deposit

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45. How much is one point worth?

10 percent of the mortgage

0.1 percent of the mortgage

1 percent of the mortgage

$1000

Answer

Correct Answer: 1 percent of the mortgage

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46. What is meant by the term "Usury"?

Charging people a fair market interest rate based on their credit

Charging people zero interest rate

Financing a car using an auto loan

Charging interest rates in excess of what is standard and customary

Answer

Correct Answer: Charging interest rates in excess of what is standard and customary

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47. What is meant by Predatory Lending?

Lending money to people who are extended beyond their means in an attempt to get them to spend more than they should

Lending money to high net worth individuals

Lending people money to buy a car

Lending money to students to pay for their education

Answer

Correct Answer: Lending money to people who are extended beyond their means in an attempt to get them to spend more than they should

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48. What is the process of evaluating a loan application to determine the advisability of making the loan called?

Debt-to-income ratio

Underwriting

Surveying

Assessing

Answer

Correct Answer: Underwriting

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49. What can a lender do if a borrower refuses to pay back a loan?

Nothing — it is a risk the lender takes for high returns

Sue the borrower in a small claims court

Call the bank that helped structure the loan

A loan is a debt contract, and the borrower can be sued for the funds

Answer

Correct Answer: A loan is a debt contract, and the borrower can be sued for the funds

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50. What does the term "Covenant" mean?

A bond coupon payment

The principal portion of a loan

The monthly payment on a loan

An agreement or promise to do or not to do a particular thing related to a loan

Answer

Correct Answer: An agreement or promise to do or not to do a particular thing related to a loan

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51. Why have credit cards become a popular method of payment?

Because no credit history is required to get a credit card

Because they are inexpensive

Because regular loans are no longer available to everyday consumers

Because they enable a person to make purchases without having any money at the time of the purchases

Answer

Correct Answer: Because they enable a person to make purchases without having any money at the time of the purchases

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52. What is meant by the term "Credit Repository"?

The physical location where all mortgage papers are signed

An organization that gathers, records, updates, and stores the information about the financial, public and payment records of the individuals who are being considered for credit

A central clearing house for all loan transactions

The loss of money, property, rights, or privileges due to a breach of legal obligation

Answer

Correct Answer: An organization that gathers, records, updates, and stores the information about the financial, public and payment records of the individuals who are being considered for credit

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53. What does the term "General Recourse" mean?

Rights to demand payment from the general assets of the debtor, without seniority in access to any specific assets

The process taken to apply for a mortgage

The payment of escrow to the seller

The closing process

Answer

Correct Answer: Rights to demand payment from the general assets of the debtor, without seniority in access to any specific assets

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54. What does the term "Survey" imply?

An assessment of a person's credit

The intentional and voluntary giving up of rights or claims

The ability of a lender to provide clients with a better rate

The determination of the exact boundaries and location of a property

Answer

Correct Answer: The determination of the exact boundaries and location of a property

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55. How would a company that purchased a building using a mortgage show it in its account books?

Dr: Cash, Cr: Interest Payable

Dr: Buildings, Cr: Mortgage Liability

Dr: Interest Payable, Cr: Mortgage Liability

Cr: Cash, Cr: Mortgage Liability

Answer

Correct Answer: Dr: Buildings, Cr: Mortgage Liability

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56. Why can a lender not deduct the loans made from their net income?

Because there is no reduction in their assets — there is only a change from cash assets to receivables

Because it is considered the income of the borrower

Because it has minimal impact on tax revenue

Because there is no need to include it as long as the loan is paid back within a year

Answer

Correct Answer: Because there is no reduction in their assets — there is only a change from cash assets to receivables

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57. What would happen to the balance sheet of a company that has automobiles with loans associated with them, and sells the automobiles for more than the carrying value of the loan?

There will be no impact

The company would be out of compliance with loan covenants

There will be gain on the sale of automobiles, and a reduction in debt

There will be loss on the sale of automobiles, and an increase in debt

Answer

Correct Answer: There will be gain on the sale of automobiles, and a reduction in debt

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58. What type of debt do credit cards fall under?

Revolving debt

Unsecured debt

Secured debt

All of the above

Answer

Correct Answer: Revolving debt

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59. How does a credit card differ from a personal loan?

Credit cards offer more favorable interest rates

Credit cards are usually for higher credit amounts

Credit cards always have a physical card, loans never do

Credit cards have open ended payment schedules

Answer

Correct Answer: Credit cards have open ended payment schedules

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60. What is the debt that must be repaid before a subordinated debt receives any payment in the event of default called?

Down Payment

Senior Debt

Subsequent Debt

Second Round Debt

Answer

Correct Answer: Senior Debt

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61. What does the term "Foreclosure" denote?

The transfer of the seller's existing mortgage to the buyer

The process of applying for a mortgage

The Legal process by which the lender or the seller forces the sale of a mortgaged property because the borrower has not met the terms of the mortgage.

The process of finding undervalued properties for investment purposes

Answer

Correct Answer: The Legal process by which the lender or the seller forces the sale of a mortgaged property because the borrower has not met the terms of the mortgage.

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62. How is interest on a loan shown on the financial statements?

As a long term liability

As a short term liability

As revenue

As an expense incurred during the period

Answer

Correct Answer: As an expense incurred during the period

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63. What is meant by the term "Portfolio"?

A collection of loans held by a borrower

Anything offered or given to fulfill the performance of a contract

The interest payment of a loan

A combination of assets held for its investment benefits including financial and non-financial returns

Answer

Correct Answer: A combination of assets held for its investment benefits including financial and non-financial returns

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64. What is the term used when a borrower does not pay back their loan?

Recession

Default

Extraction

Extortion

Answer

Correct Answer: Default

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65. What happens if a lender charges a rate beyond what is legally allowed and the borrower does not pay?

The lender can not sue the borrower for any amount

The lender can not sue the borrower to repay the amount beyond what is legally allowed

The lender can have the borrower imprisoned for fraud

The lender goes bankrupt

Answer

Correct Answer: The lender can not sue the borrower to repay the amount beyond what is legally allowed

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66. What is meant by the term "Impound"?

Customary costs above and beyond the sale price of a property that must be paid to cover the transfer of ownership at closing

The portion of a borrower's monthly payments held by the lender or service provider to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due

The time frame of a mortgage

The implied interest rate

Answer

Correct Answer: The portion of a borrower's monthly payments held by the lender or service provider to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due

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67. What is meant by Subprime Lending?

Mortgages aimed at the poor/uneducated people at higher interest rates

Mortgages aimed at the rich and wealthy

Mortgages offered at the fair market rate

Mortgages geared towards people with jobs

Answer

Correct Answer: Mortgages aimed at the poor/uneducated people at higher interest rates

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68. Should a loan be taken out just for its tax benefits?

Yes, the tax benefits make any loan amount worth it

Yes, as long as the loan is paid back in the same year

No, unless the loan is for over $100,000

No, the benefit of deduction of loan interest does not offset the cost of the interest

Answer

Correct Answer: No, the benefit of deduction of loan interest does not offset the cost of the interest

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69. What type of repayment plans do credit cards typically have?

Exactly half is due

Some small portion of the consumer's total balance is due each month

They must be paid in full

Only interest is due each month

Answer

Correct Answer: Some small portion of the consumer's total balance is due each month

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70. What is meant by a secured loan?

A loan which uses some form of collateral as a guarantee of payment

A loan under $10,000

A loan for people with bad credit

A short term loan for less than a year

Answer

Correct Answer: A loan which uses some form of collateral as a guarantee of payment

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71. What does the term "Deferment" denote?

The process of researching loan options

The process of applying for government mortgage funding

An approved temporary suspension of loan payments based on certain events and criteria

Adding interest that has accrued onto the principal balance

Answer

Correct Answer: An approved temporary suspension of loan payments based on certain events and criteria

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72. What is the payment of the monthly installment by the borrower to the lender called?

Servicing

Liability

Financing

Bond payment

Answer

Correct Answer: Servicing

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73. When do lenders require Private Mortgage Insurance (PMI)?

When the loan to value ratio is greater than 80%

When the buyer makes under $40,000 a year

When the buyer has unfavorable credit

When the buyer is a millionaire

Answer

Correct Answer: When the loan to value ratio is greater than 80%

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74. What is an interest only loan?

A loan on which interest accrues only in the second year

A loan on which the borrower has to pay back only the interest and not the principal

A loan on which the borrower has to pay only the interest for a specified time period, not reducing the principal at all

A type of mortgage

Answer

Correct Answer: A loan on which the borrower has to pay only the interest for a specified time period, not reducing the principal at all

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75. How do consumers abuse loan practices?

They lie on their credit applications to get better interest rates

People obtain loans with no plan to pay them back

People use loan funds for purposes other than they should

All of the above

Answer

Correct Answer: All of the above

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76. Why is interest earned on a loan considered taxable revenue?

Because it is revenue only if over $1,000

Because it was earned legally and therefore must be included in revenue

Because the SEC requires it

Because interest is profit generated by providing a loan and is income to the lender

Answer

Correct Answer: Because interest is profit generated by providing a loan and is income to the lender

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77. What is an unsecured loan?

An automobile loan

A loan where the debtor's credit is the only thing at stake

A loan only for uneducated people

A loan with no collateral; the lender has no assets backing the loan

Answer

Correct Answer: A loan with no collateral; the lender has no assets backing the loan

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78. Why is a loan not taxable income?

Because there are laws against it

Because there is no increase in the wealth of the person taking a loan

Because people lie on their tax returns and do not include it

Because taxing them is not fair to people

Answer

Correct Answer: Because there is no increase in the wealth of the person taking a loan

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79. What does the term "Endowment" mean?

The percentage of gross monthly income that goes towards paying housing expenses

A fund that contains assets the use of which is restricted only to the income earned by these assets

The same as an escrow account

The process of applying for a mortgage

Answer

Correct Answer: A fund that contains assets the use of which is restricted only to the income earned by these assets

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80. What does the term "Assignment" denote?

The transfer of ownership of mortgage from one company or individual to another

The process of researching a property's title

Filing for bankruptcy

A provision in a mortgage home loan that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the loan

Answer

Correct Answer: The transfer of ownership of mortgage from one company or individual to another

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Loans & Lending Practices MCQs | Topic-wise

MCQ on Basic Loans & Lending Practices

General Loans & Lending Practices MCQs

Loans & Lending Practices Subjects

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Loans & Lending Practices MCQ

Loans & Lending Practices Skill Assessment

Loans & Lending Practices PDF

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