Credit and debt: interest rates, credit scores and loans
Grade 12 Social Studies Worksheet
Circle the best answer.
Read this first
Three $12,000 car loans (example figures, made up for practice)
Loan APR Months Monthly payment Total interest Loan 1 5% 48 $276 $1,265 Loan 2 11% 48 $310 $2,887 Loan 3 5% 72 $193 $1,915 Each loan is for an adult buyer, and each is paid off on schedule.
Milo compares Loan 1 with Loan 3, both at 5%. Which statement does the card support?
- Loan 1 costs more in total, because its monthly payment of $276 is the higher of the two.
- The loans cost the same, because they have the same APR and the same $12,000 amount.
- Loan 3 costs less overall, because its lower payment means the buyer pays less each month.
- Loan 3 has the lower payment, $193, but costs $650 more in interest over 24 extra months.
A buyer can pay at most $200 a month. Which choice and caution does Pia give from the card?
- Loan 1, because it has the lowest total interest, so it is the cheapest for this buyer.
- Only Loan 3 fits, at $193 a month; it costs $650 more in interest than Loan 1 would have.
- Loan 3, because its lower payment also gives it the lowest total interest of the three.
- Loans 2 and 3, because both have payments under $320 and the buyer can fit either one.
Loans 1 and 2 are both 48-month loans for $12,000. Ari compares them. What does the APR gap cost?
- Nothing more on Loan 2, since both loans borrow $12,000 and the lender is paid back $12,000.
- $1,622 more in interest on Loan 2: a 6-point higher APR on the same amount and term.
- $720 more in interest on Loan 2, because 6% of $12,000 is the cost of the APR gap.
- $34 more a month on Loan 2, so the APR gap costs just the $34 difference in the payment.
Card
a fixed-rate loan (made up for practice). A borrower and a lender sign a loan at a fixed 6%. At signing both expect prices to rise 2% a year. Prices rise 5% a year instead. At the same time, a saver earns 3% on a deposit.
Compared with what both sides expected, who gains from the surprise? Bo decides.
- Both equally: inflation cancels out, because it raises prices for the lender and the borrower alike.
- Neither: the contract still says 6%, so nothing changed for the borrower or the lender.
- The lender: higher inflation raises the dollars the lender collects, so the lender gains.
- The borrower: the real rate falls from about 4% to about 1%, so repayments buy less for the lender.
The saver wonders about holding cash or the deposit. What does Esme say about buying power over a year?
- Both lose the same, because prices rise 5% and that rise applies to cash and deposits alike.
- The deposit keeps more: cash loses 5% of its buying power, but the 3% deposit loses about 2%.
- Cash keeps more, since the deposit's 3% is below the 5% rise in prices and so the deposit loses value.
- The deposit gains 3% in buying power, since the bank pays 3% and that is what the saver keeps.
Two adult borrowers' credit use (example figures, made up for practice)
Borrower Credit limit Balance Late payments in 12 months Dana $5,000 $4,750 0 Eli $5,000 $500 2 The Consumer Financial Protection Bureau lists bill-paying history and how much of the available credit is used among the factors that scoring models consider.
Kira compares the two borrowers using the card. Which statement does the card support best?
- The scores are equal, because each borrower is strong on one of the two listed factors.
- Dana has the cleaner record and Eli uses less credit; the card cannot rank their scores.
- Eli's score is higher, because using 10% of his credit is far better than using 95%.
- Dana's score is higher, because a perfect payment record outweighs any other factor.
The card charges 18% APR, which is 1.5% a month on the balance still owed. There are no new purchases. Ren looks at each step up in the monthly payment on the card. Which statement does the table support?
- Each step saves the same, because the APR is 18% in each case and APR sets the saving.
- Savings grow at each step, since a bigger payment cuts more interest than the one before.
- The $150 payment saves nothing beyond the $100 payment, since the balance is nearly paid.
- Each step saves interest, but the saving per extra dollar of payment shrinks.
Use this
Two $9,000 loans over 36 months (example figures, made up for practice). Columns: Loan, APR, Monthly payment, Total interest. Car loan, secured by the car, 6%, $274, $857; Personal loan, unsecured, 12%, $299, $1,761. Both loans are for adult borrowers. If a borrower stops paying, the lender may take the car on the secured loan.
Tala asks why the secured loan carries 6% and the unsecured loan 12%. Which reason fits the card?
- Cars lose value, so lenders charge less on loans for cars than on any other loan.
- Borrowers who need unsecured loans have worse credit, so the rate on theirs is higher.
- If the borrower stops paying, the lender may take the car, which cuts the lender's risk of loss.
- Lenders like cars, and that liking is passed on to the borrower in the form of a lower rate.
Jun compares the two loans on cost. Which statement does the card support?
- The unsecured loan costs $25 more, since the monthly payment is the full difference in cost.
- The secured loan costs more, since the buyer also risks losing the car on top of paying.
- The two loans cost the same, since both borrow $9,000 over the same 36 months.
- The unsecured loan costs $904 more in interest and $25 more a month than the secured loan.
Card
An ad (made up for practice). "Our average customer saves $1,000 in interest." The ad does not say what the customers would have paid elsewhere, their loan amounts or their terms.
What must the ad show before Zee can call $1,000 a saving?
- The lender's APR, since the APR alone shows how much interest each customer saves.
- What the same customers would have paid otherwise, on loans of the same amount and term.
- How many customers were surveyed, since a saving needs a large sample behind it.
- The lender's profit on each loan, since a saving for customers is a cost to the lender.
