AFIP AFIP Credit and Lending Fundamentals 1 — Questions and Answers
Question 1: What does the term 'credit score' primarily measure in the context of consumer lending?
- A borrower's likelihood of repaying debt on time (Correct answer)
- The total amount of debt a consumer holds
- A consumer's annual income level
- The number of credit accounts a consumer has opened
Correct answer: A borrower's likelihood of repaying debt on time
A credit score measures the statistical likelihood that a borrower will repay debt obligations on time based on credit history.
Question 2: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers before finalizing a loan?
- Fair Credit Reporting Act (FCRA)
- Truth in Lending Act (TILA) (Correct answer)
- Equal Credit Opportunity Act (ECOA)
- Fair Debt Collection Practices Act (FDCPA)
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) mandates that lenders disclose the APR and other loan terms to borrowers prior to consummating a credit transaction.
Question 3: In auto financing, what is the primary difference between a secured loan and an unsecured loan?
- Secured loans have lower interest rates because collateral backs the debt (Correct answer)
- Unsecured loans require a co-signer while secured loans do not
- Secured loans are only available to prime borrowers
- Unsecured loans always have shorter repayment terms
Correct answer: Secured loans have lower interest rates because collateral backs the debt
Secured loans use collateral (such as the vehicle itself) to back the debt, reducing lender risk and typically resulting in lower interest rates.
Question 4: What does 'debt-to-income ratio' (DTI) represent in the lending qualification process?
- The ratio of total assets to total liabilities
- Monthly debt payments divided by gross monthly income (Correct answer)
- Total credit card balances divided by credit limits
- The percentage of income saved each month
Correct answer: Monthly debt payments divided by gross monthly income
DTI is calculated by dividing a borrower's total monthly debt payments by their gross monthly income, helping lenders assess repayment capacity.
Question 5: Which credit bureau scoring model is most commonly used by auto lenders and finance companies in the United States?
- VantageScore 3.0
- FICO Score (Correct answer)
- TransUnion CreditVision
- Equifax Risk Score
Correct answer: FICO Score
The FICO Score is the most widely used credit scoring model in the United States, with auto lenders frequently using industry-specific FICO Auto Score versions.
Question 6: In dealership finance, what is a 'reserve' in the context of F&I (Finance and Insurance)?
- Money set aside by the dealer for future expenses
- The difference between the buy rate and the sell rate on a loan (Correct answer)
- A portion of insurance premiums held in escrow
- A required down payment held by the lender
Correct answer: The difference between the buy rate and the sell rate on a loan
In F&I, dealer reserve is the markup between the interest rate a lender offers (buy rate) and the rate charged to the customer (sell rate), representing dealer compensation.
AFIP AFIP Credit and Lending Fundamentals 1
What does the term 'credit score' primarily measure in the context of consumer lending?