CCDS Consumer Debt Products & Interest Calculations 2 — Questions and Answers
Question 1: Under the Truth in Lending Act (TILA), lenders must disclose the APR primarily to help consumers:
- Calculate their monthly payment
- Compare the true cost across different loan offers (Correct answer)
- Determine the lender's profit margin
- Negotiate a lower principal balance
Correct answer: Compare the true cost across different loan offers
TILA mandates APR disclosure so consumers have a standardized metric to compare financing costs across competing offers.
Question 2: A consumer has a $10,000 auto loan at 6% annual interest amortized over 48 months. If the monthly payment is approximately $235, how much of the FIRST payment is interest?
- $50 (Correct answer)
- $235
- $50
- $185
Correct answer: $50
First-month interest = $10,000 × (6%/12) = $10,000 × 0.005 = $50.
Question 3: Which consumer debt product typically carries the highest average interest rate?
- 30-year fixed mortgage
- Federal student loan
- Credit card (Correct answer)
- Auto loan
Correct answer: Credit card
Credit cards routinely carry the highest rates among common consumer debt products, often ranging from 18% to over 30% APR.
Question 4: A 'teaser rate' on a credit card is best described as:
- A permanent low rate for loyal customers
- A temporary promotional APR that resets to a higher standard rate (Correct answer)
- The penalty rate triggered by late payments
- The cash advance rate
Correct answer: A temporary promotional APR that resets to a higher standard rate
Teaser rates are introductory promotional APRs offered for a limited period before reverting to the card's standard (higher) APR.
Question 5: The Credit CARD Act of 2009 restricts credit card issuers from applying rate increases to:
- New purchases made after the increase notice
- Existing balances already carried on the account (Correct answer)
- Cash advances taken after the rate increase
- Penalty APRs triggered by 60-day delinquency
Correct answer: Existing balances already carried on the account
The Credit CARD Act prohibits retroactive rate increases on existing balances, protecting consumers from sudden cost increases on debt already incurred.
Question 6: Compound interest differs from simple interest in that compound interest:
- Is calculated only on the original principal
- Accrues interest on both principal and previously earned interest (Correct answer)
- Never applies to consumer loans
- Results in lower total interest costs
Correct answer: Accrues interest on both principal and previously earned interest
Compounding calculates interest on the accumulated balance (principal plus prior interest), causing balances to grow faster over time.
Question 7: A debt consolidation loan is most beneficial when it:
- Has a higher APR than the debts being consolidated
- Extends the repayment term without reducing the interest rate
- Carries a lower interest rate than the existing debts (Correct answer)
- Requires collateral equal to twice the loan amount
Correct answer: Carries a lower interest rate than the existing debts
The primary benefit of debt consolidation is replacing multiple high-rate debts with a single lower-rate loan, reducing total interest paid.
CCDS Consumer Debt Products & Interest Calculations 2
Under the Truth in Lending Act (TILA), lenders must disclose the APR primarily to help consumers: