AFIP AFIP Credit and Lending Products 1 — Questions and Answers
Question 1: What is the primary purpose of a dealer reserve in an auto finance transaction?
- To compensate the dealer for arranging the financing (Correct answer)
- To fund the vehicle's warranty
- To cover the lender's loan origination costs
- To provide gap insurance to the buyer
Correct answer: To compensate the dealer for arranging the financing
Dealer reserve is the difference between the buy rate offered by the lender and the contract rate charged to the customer, and it compensates the dealer for arranging the loan.
Question 2: Which federal law requires creditors to disclose the Annual Percentage Rate (APR) to borrowers before consummation of a loan?
- Equal Credit Opportunity Act
- Truth in Lending Act (TILA) (Correct answer)
- Fair Credit Reporting Act
- Gramm-Leach-Bliley Act
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA), implemented by Regulation Z, mandates disclosure of the APR and other key loan terms before the borrower is bound.
Question 3: A customer has a credit score of 580. In auto lending, this score typically falls into which tier?
- Prime
- Super-prime
- Subprime (Correct answer)
- Near-prime
Correct answer: Subprime
Scores below approximately 620 are generally classified as subprime, indicating higher default risk to lenders.
Question 4: What does Loan-to-Value (LTV) ratio measure in an auto loan?
- The borrower's monthly payment relative to income
- The loan amount compared to the vehicle's value (Correct answer)
- The interest rate relative to the prime rate
- The dealer's profit margin on the deal
Correct answer: The loan amount compared to the vehicle's value
LTV is the loan amount divided by the vehicle's value, and lenders use it to gauge collateral coverage and risk.
Question 5: Which of the following is an example of an open-end credit product offered in F&I?
- Retail installment contract
- Home equity line of credit (HELOC) (Correct answer)
- Student loan
- Auto lease
Correct answer: Home equity line of credit (HELOC)
A HELOC is open-end credit because the borrower can draw, repay, and redraw up to a set limit, unlike a closed-end installment loan.
Question 6: In a simple interest auto loan, how is interest calculated each month?
- On the original loan amount regardless of payments made
- On the remaining principal balance at the time of the payment (Correct answer)
- On the total interest contracted at origination divided equally
- On the dealer's buy rate rather than the contract rate
Correct answer: On the remaining principal balance at the time of the payment
Simple interest loans accrue interest daily on the outstanding principal balance, so early or extra payments reduce total interest paid.
AFIP AFIP Credit and Lending Products 1
What is the primary purpose of a dealer reserve in an auto finance transaction?