How sharp are you when it comes to borrowing money? Are you aware of some of the advantages, tricks and traps when you weigh the various offers from lenders?
Most consumers aren’t. But if you test yourself with this Credit Quiz, you’ll be a few steps ahead of the game.
Get three or more of the following right and you qualify as a skilled borrower who probably won’t be taken for a ride. One or two correct answers is OK, but anything less than that means you probably shouldn’t try to borrow a dime until you learn the ropes. Answers appear at the end of the column.
Question 1: You need $5,000 cash for an emergency. Which of the following is the smartest move?
A) Get a cash advance from the lowest-rate credit card you can find.
B) Open a home equity line of credit account, but only at the 8.25 percent prime rate.
C) Borrow from your 401(k) plan at the company where you work.
Question 2: When the average new car customer is trying to decide whether to buy or lease a vehicle, the point they most often overlook is:
A) How many miles they drive per year.
B) Which deal offers the cheaper monthly payment.
C) How long they plan to keep the car.
Question 3: You should obtain a copy of your credit report at least once a year because:
A) Chances are one out of four you’ll discover an error on your report that wasn’t your doing.
B) A creditor might not have cleared up a blemish on your record.
C) When you disputed a bill with someone you owed money to, you failed to insert your side of the story into your credit record.
Question 4: Three mortgage lenders offer different deals on a $100,000 loan. One is a 30-year fixed rate at the current average of 7.88 percent; the second has a 15-year fixed rate at 7.46 percent, and the third outfit advises a 5.71 percent adjustable-rate mortgage (ARM). You plan to stay in the house for at least 5 to 10 years. You should:
A) Grab the 30-year loan because the monthly payment will be smaller.
B) Take the 15-year mortgage, even though the payment will be slightly higher.
C) Go with the 5.71 percent ARM because you’ll save a bundle on your payments.
Question 5: You’re tempted to get a $25,000, 10-year home equity loan against your home. Should you opt for:
A) An introductory rate of 7.75 percent.
B) A fixed rate equivalent to the 8.25 prime rate.
C) Interest-only payments, with no payments on the principal until the end of the loan term.
Answers:
1) C. You can borrow up to 50 percent of your vested balance usually at about the prime rate. The loan can be paid back by payroll deductions or in one lump sum, but in either case the interest on what you borrowed will be credited to your 401(k) account.
2) C. Leased cars have a “residual value” at the end of the lease term. That’s what you can buy the car for when the lease expires, but the lessor, especially car manufacturers, can jack up the value as they low-ball you with cheap monthly payments to make the deal look attractive.
3) All three–A, B and C–are correct.
4) B. If you can afford a higher monthly payment of $919 for 15 years versus $721 a month for 30 years, you’ll save a stunning $99,024 in total interest! The ARM is a no-no because the rate could adjust to as high as 11.71 percent in the fourth year.
5) B, for two reasons: The introductory rate will rise after 6 to 12 months to an average of 1.75 percentage points above the prime rate (now at 8.25 percent) to a real rate of 10 percent. Second, if you can’t pay the $10,000 balloon note (Option C) when it comes due, you could lose the farm.
– Latest rate trend. Savings yields declined slightly, but loan rates remained unchanged.
