Exercises: Types of Loans and Borrower Responsibilities

Classify each of the following as a secured loan or an unsecured loan: an auto loan, a mortgage, a credit card, and a personal loan based only on your signature and credit history. For each one, say in a few words what makes it secured or unsecured.

Jayden borrows $\$2{,}000$ at $6\%$ simple annual interest for 3 years. Use the formula $I = P \cdot r \cdot t$ to find the total interest he will pay. Then find the total amount he will repay.

Define the term collateral. Then explain what can happen to the collateral if a borrower defaults on a secured loan, and give one example of an item that is used as collateral.

Emma borrows $\$8{,}000$ to buy a used car. The loan charges $5\%$ simple annual interest for 4 years and is repaid in 48 equal monthly payments. Find the total interest, the total repayment amount, and the monthly payment.

A credit union offers Sofia two loans of $\$5{,}000$. Offer A charges $7\%$ simple annual interest for 3 years. Offer B charges $6\%$ simple annual interest for 5 years. Both are repaid in equal monthly payments. Find the total repayment and the monthly payment for each offer. Which offer costs less in total, and which has the lower monthly payment?

Marcus borrows $\$400$ from a payday lender. The lender charges a $\$60$ fee, and he must repay the whole amount in 14 days. Find the fee as a percent of the amount borrowed. Then estimate the annual percentage rate by multiplying that percent by $\frac{365}{14}$. Compare your result with a credit union small loan at $18\%$ APR and explain what this shows about payday loans.

Mateo needs $\$12{,}000$ for a used car. A bank offers a secured auto loan at $6\%$ simple annual interest for 5 years. An online lender offers an unsecured loan at $9\%$ simple annual interest for 3 years. For each loan, find the total interest, the total repayment, and the monthly payment. Then recommend one loan. Your answer must discuss total cost, monthly budget, the risk of default, and the responsibilities Mateo takes on in each case.

Aaliyah cosigns a $\$6{,}000$ loan for her brother. The loan charges $8\%$ simple annual interest for 2 years and is repaid in 24 equal monthly payments. Her brother makes the first 10 payments and then stops paying. Find the total amount to be repaid, the amount already paid, and the amount still owed. Explain Aaliyah's legal and financial responsibilities as cosigner and how the missed payments could affect both of their credit.