Consumer Credit & Credit Approval: Review

1. Tim has gross monthly income of $5500. His monthly expenses are as listed below:
Income taxes $1500
Food $200
Entertainment $150
Student loan $200
Car loan $450
Mortgage $1200
Property tax $200
Heat $100

a. Calculate his Total Debt Service Ratio (TDSR)

b. Tim would like to arrange a new loan with monthly payments of $250. Explain whether or not he will be
approved for the loan

2. The amount of loan that a bank is willing to lend an individual depends on which of the following
reasons?
(a) The person’s employment income
(b) The value of collateral available
(c) The amount of other debt outstanding
(d) (a), (b), and (c)

3. On which of the following loans will the bank charge the highest rate of interest?
a. Home equity credit line
b. Investment loan
c. Home mortgage
d. Unsecured credit line

4. Which of the following statements concerning investment loans is true?

a. The interest expense on the loan is not tax deductible.
b. The rate of interest charged on an investment loan is lower than that of a consumer loan.
c. Investment loan does not depend on the borrower’s income.
d. (b) and (c).

5. Mr. Harris has $2,000. He wants to borrow another $1,000 from the bank at 5% interest so that he can
invest $3,000 in a mutual fund that has an expected rate of return of 11%. What is the expected rate of
return on investment?
a. 11%
b. 6%
c. 14%
d. 8%
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6. Eddie and Cecelia have an annual gross income of $55,000. Their monthly mortgage payment is $1,150. If
their GDS ratio is 0.28, what is the annual property tax on their condominium?
a. $1,450
b. $1,500
c. $1,600
d. $1,800

7. Related to consumer credit

a. The interest rate on a loan is based on the risk with the borrower
b. Prepayments on consumer loans are not allowed
c. Most clients receive prime rate on their loans
d. The main benefit of providing security for a loan is a higher interest rate

8. Mandy, a CFP professional, used credit bureau information to complete a review for her client Annie. The
Credit bureau is
a. A government organization that keeps track of individual’s credit history
b. A private organization that keeps track of individuals credit history
c. A self- regulatory organization that keeps track of individuals credit history
d. A financial institution that keeps track of the individuals credit history

9. Line of Credit provides the following benefits EXCEPT:

a. Access to a specific amount of credit that can be reused as needed
b. No requirement to seek credit approval each time one needs credit
c. Regular monthly principal and interest payments regardless of balance amount
d. Lower interest rate if secured by personal assets

10. Rex is short of funds to pay his bills at the end of the week. His best solution is to :
a. Take out a cash advance on his VISA card
b. Cover the payments through his line of credit
c. Arrange a pay day loan
d. Pay the bills and let his bank account go into overdraft

11. The amount a bank is willing to lend an individual depends on all of the following EXCEPT:
a. The person’s employment income
b. Value of collateral available
c. The amount of other debt outstanding
d. Whether the loan is repaid biweekly or monthly

12. Which of the following loans will the bank charge the highest interest rate?
a. Home equity credit line
b. Investment loan
c. Home mortgage
d. Unsecured credit line

13. Matt is arranging a loan at his bank to purchase new furniture. Which of the following can he use as
collateral for his loan?
a. His term life insurance
b. His coin collection
c. The GICs in his RRSP
d. The money market mutual funds in his non-registered portfolio