The Ultimate Lines of Credit Quiz

Estimated Completion Time
4 min
The Ultimate Lines of Credit Quiz
Image: Lenny Fuhrman/Getty

About This Quiz

If you require some flexibility to finance a long-term project, then a line of credit may be the tool you are seeking. Available to individuals and businesses, a line of credit works in a similar fashion to a credit card but typically has lower interest rates and higher credit limits. Why not test yourself by taking this quiz before you decide whether this type of loan is for you.
What is a line of credit?
With a line of credit, the bank divides the loan principal into four payments to your account over a fixed period.
A line of credit is a debt consolidation loan, the bank pays off your credit cards and then cancels the cards.
A line of credit is a loan where you have a fixed maximum limit and write checks as needed over several years. A line of credit gives you flexibility to finance long-term plans without making payments on more money than you need to use immediately.
A line of credit is a loan where you have a fixed maximum limit and write checks as needed over several years. A line of credit gives you flexibility to finance long-term plans without making payments on more money than you need to use immediately.

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What is the main advantage of using a line of credit to finance a project versus using a credit card?
You will pay lower interest rates.
The main advantage to using a line of credit is that interest rates are much lower than on a credit card. The credit limit on a line of credit is also much higher.
Contractors do not accept credit cards.
Credit cards are stolen often.

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What is the difference between a secured and unsecured line of credit?
A secured line of credit has a fixed interest rate for the life of the loan.
A secured line of credit is backed by life insurance.
A secured line of credit is backed by your collateral.
With a secured line of credit, you give the lender the right to seize designated collateral if you fail to make the loan payments.

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What is the main advantage of an unsecured line of credit?
The lender places a lien on your collateral so you cannot sell it but they cannot seize it if you default.
You are not required to have any collateral in order to arrange the line of credit.
The advantage of an unsecured line of credit is that you are not required to have collateral or to put your possessions at risk in order to obtain the loan. A disadvantage is that you will pay a higher interest rate because the lender has more risk.
An unsecured line of credit has a variable interest rate that fluctuates with the prime rate.

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What is an advantage of a line of credit over a traditional loan?
You make payments only on the amount of credit used.
Instead of making payments on the entire loan principal that is available, you only have to make payments on the credit used. Technically, you are borrowing only the amount you need without constantly being required to apply for loans.
The unused portion of the line of credit earns interest that is applied to lower your monthly payment.
Your monthly payments are a fixed amount regardless of the portion of credit used.

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How many types of secured lines of credit are available to borrowers?
four
three
two
Lines of credit fall into two main types: personal line of credit and business line of credit. Both types function in a similar way.

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What is a typical secured personal line of credit that is available to individuals?
personal asset line of credit
home equity line of credit
A typical secured personal line of credit is called a home equity line of credit (HELOC). You secure a loan based on the market value of your home.
401(k) line of credit

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What is the set period of time that you may write checks on your HELOC called?
a cushion term
a draw term
With a HELOC, you have a set period of time that you may draw funds from the line of credit called a draw term. The draw term is usually around 10 years.
a decade term

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What would be a good reason to set up a personal line of credit?
You are planning an extended trip to Las Vegas with your partner.
You want to consolidate all your debits into one loan with favorable interest rates.
You have a series of upcoming medical costs and are unsure of exact amounts or dates for each payment.
A line of credit is a perfect tool for financing a series of undetermined medical costs. If you are planning a trip to Las Vegas it would be wise to leave your line of credit checks in a safe place at home.

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What are the usual terms for interest calculation on most lines of credit?
fixed interest rate
variable interest rate
Most lines of credit charge a variable interest rate based on the prime rate plus a fixed margin. The interest rate will always be the prime rate plus the agreed upon fixed margin.
average interest rate adjusted once yearly

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What would be the best reason for arranging a HELOC that you only make payments on the interest and do not pay down the loan principal?
Your payments over the draw term will be much lower.
You can always arrange a personal loan to pay the principal at the end of the draw term.
You know that you are going to receive a large amount of money at the end of the draw term.
The best reason to arrange interest only payments on a HELOC is in the situation where you will receive enough money, such as an inheritance, to pay the principal at the end of the draw term. With the other two choices you could find yourself owing the full amount at the end and unable to pay it.

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What is the usual name applied to a home equity loan?
second mortgage
A home equity loan is usually referred to as a second mortgage. A home equity loan is a lump sum loan with interest and rates of payment established upon signing the loan.
HELOC
reverse mortgage

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How does the lender typically require a business to secure a business line of credit loan?
Most lenders will require a business seeking a line of credit to provide a block of common shares as collateral.
Most lenders will require the business owner to provide a percentage of personal assets to secure the loan.
Most lenders will require a business owner to use the business assets as collateral.
Lenders typically require a business to secure their line of credit with business assets. Business assets include such items as computers, furniture and vehicles.

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What criteria does a lender use to determine if a business if worthy to receive a business line of credit?
profit and loss history
business risk
both of the above
Business lenders will look at a business to assess profit and loss history as well as future business risk before approving a business line of credit. They will also check for other risks that the business may be taking such as an investment in questionable technologies.

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In the United States, what factor has the greatest impact on interest rates charged on personal or business lines of credit?
Loan interest rates are set based on the prime interest rate charged by the U.S. Federal Reserve.
The factor that has the greatest impact on interest rates charged on lines of credit is the prime interest rate charged by the U.S. Federal Reserve. The Federal Reserve uses many variables to determine what the prime rate will be at any given time.
Loan interest rates are set based on performance of the stock and bond markets.
Loan interest rates are set based on money market rates and the price of gold.

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