3.2 Borrowing, Credit, and Debt

Why consumers borrow, how lenders judge creditworthiness, and strategies to manage debt.

Transcript (170 lines)

0:00 Week five.
0:01 Sadie's festival fund holds two hundred dollars, five automatic forty-dollar
0:05 transfers deep, on plan for week twelve.
0:08 Then her phone lights up: Sunfall weekend passes are on sale now,
0:13 two hundred sixty dollars, and the sale page says current pricing holds while
0:17 supplies last. A friend texts the group chat that last year's tier sold out early.
0:22 Sadie is sixty dollars short of a pass she was not supposed to need for seven more
0:27 weeks, and before the night ends, three different lenders will offer to cover the
0:31 gap. This topic prices each offer.
0:35 I'm Logan Shaffer, and this is MAMAKO's AP Business,
0:39 Topic 3.2: Borrowing, Credit, and Debt.
0:43 Two skills by the end: explain why consumers borrow and what each kind of
0:48 lender charges, and judge creditworthiness the way a lender does,
0:52 then manage credit and debt with a strategy.
0:55 Practice questions for this topic are in the next video.
0:58 Let's go.
1:01 Consumers borrow when the thing they want costs more than current income plus
1:05 accumulated savings, and the classic three are a car,
1:09 a house, and college tuition.
1:11 Consumers also borrow to cover an emergency, to keep savings intact while
1:15 making a purchase, or for convenience, the way one tap settles a checkout.
1:21 Sadie's case is the first reason at small scale: the pass costs two hundred sixty
1:25 dollars and the fund holds two hundred.
1:28 Every version carries the same consequence: borrowing creates a personal
1:32 liability, a debt, and the borrower repays the loan with interest.
1:37 What that interest costs depends on the lender, the type of loan,
1:41 the amount borrowed, and the borrower's credit history.
1:45 One split sorts every loan in this topic.
1:47 A secured loan is backed by collateral, an asset the lender can take if the borrower
1:52 stops paying, and car loans and mortgages qualify because the car and the house are
1:57 the collateral.
1:58 Collateral lowers the lender's risk, so secured loans typically carry lower
2:03 interest rates.
2:04 An unsecured loan has nothing behind it except the borrower's promise,
2:08 which is why general consumer loans and credit cards charge more.
2:13 Every offer chasing Sadie tonight is unsecured.
2:17 Line the lenders up by price.
2:20 Row one, commercial banks and credit unions, usually the cheapest and always
2:25 the pickiest.
2:26 Their loan money is the deposits savers place with them:
2:30 a bank lends to consumers, businesses, nonprofits, and governments out of the
2:34 balances sitting in its own accounts.
2:37 Sadie met this machine from the saving side in Topic 3.1,
2:42 and her festival balance is part of what her credit union lends out this week.
2:47 Savers fund borrowers, which is why one building runs both sides of this unit.
2:52 Row two, credit card companies and retail store cards,
2:56 unsecured lending priced accordingly; the student card offer in Sadie's mail reads
3:01 twenty-four percent.
3:03 Row three, mortgage lenders and auto lenders, cheaper than the cards because
3:07 the house or the car secures the loan.
3:10 Row four, alternative financial services: payday loan storefronts,
3:15 check-cashing services, and instant tax refund advances.
3:19 This row charges the most because it serves the borrowers every other row turns
3:24 away, and price rises with risk.
3:27 There is a payday storefront near Hillcrest Market that would hand Sadie
3:31 cash tonight, at a rate that makes the twenty-four percent card look gentle.
3:36 The next card computes why she never walks in.
3:40 Here is how close it gets.
3:42 The night the passes drop, the pay-in-four checkout is open on her phone,
3:46 name, address, and debit card already entered, and the student card offer sits
3:51 in the next tab. The group chat reads, we're all buying tonight.
3:56 Sadie makes the case out loud, and it sounds responsible:
3:59 sixty-five dollars is less than one paycheck, the plan charges zero interest,
4:04 and the money is coming anyway.
4:06 Her thumb is over the confirm button.
4:08 Run all three paths before the tap.
4:11 Path one, cash: keep saving and buy in week seven, two hundred sixty dollars,
4:17 done.
4:18 Path two, pay-in-four: four payments of sixty-five dollars,
4:22 one every two weeks, zero interest if every payment lands on time,
4:27 and a ten-dollar late fee for each one that does not.
4:31 Lay that schedule on her calendar and payments three and four land in the same
4:35 weeks as her ninety-dollar travel share and her hundred dollars of spending money.
4:40 The split rearranges the schedule and leaves the price alone,
4:44 and it becomes a liability the moment she taps.
4:47 Path three, the student card at twenty-four percent APR,
4:52 which is two percent a month: put two hundred sixty on it,
4:56 pay twenty-five dollars a month, and the debt runs twelve months and costs two
5:01 hundred ninety-four dollars and forty-four cents.
5:04 That is thirty-four dollars and forty-four cents of interest to skip two weeks of
5:09 waiting.
5:12 She never taps confirm.
5:14 She almost does.
5:17 Every number on that card was published in advance.
5:20 The APR, the late fee, and the payment schedule sit in a boxed disclosure on each
5:25 offer, because consumer protection laws require lenders to state credit terms
5:30 clearly and explicitly before a borrower commits.
5:34 The same laws govern how debts can be collected and prohibit discriminatory
5:38 lending.
5:39 The box exists so the true cost can be computed before the tap,
5:44 so read it, every time.
5:47 Now sit on the lender's side of the table.
5:50 Every lender faces default risk, the chance that the borrower never repays,
5:55 so lenders prefer borrowers with low existing debt, high income and savings,
6:00 and a record of on-time repayment.
6:02 Lenders willing to serve riskier borrowers, the payday row,
6:06 cover the extra defaults by charging higher rates.
6:10 To size up a borrower, a lender collects her income,
6:13 her savings, her existing debts, and a credit report,
6:17 the record of her past use of credit.
6:19 Credit reports are compiled by credit bureaus, also called credit reporting
6:24 agencies, companies that log information each time a consumer interacts with a
6:29 financial institution: opening a savings account, taking out a loan,
6:35 applying for a card, making a payment.
6:38 The account Sadie opened in Topic 3.1 is already an entry.
6:43 The report carries a credit score, a number summarizing that history,
6:47 and Sadie's problem is that she has none.
6:50 Two years of Hillcrest Market paychecks prove she earns steadily,
6:54 and steady income history is not credit history.
6:57 Her report shows no borrowing at all, so there is nothing a lender can price.
7:02 The stakes run past this weekend, because the same report and score can be pulled by
7:07 future lenders, landlords, employers, insurance companies,
7:11 and government agencies.
7:13 Later in this unit, a bank runs this same evaluation on a business and its
7:18 statements; the question is identical at both scales.
7:24 Her fix does two jobs with one purchase.
7:27 She waits two more weeks and accepts the sellout risk on purpose,
7:31 because the warning in the group chat was real and waiting is a risk she chooses
7:35 with open eyes.
7:37 In week seven the fund reads two hundred eighty dollars and the tier is still
7:41 listed, so she buys, routed one deliberate way: the two hundred sixty dollars goes
7:47 on a starter student card with a five-hundred-dollar limit,
7:50 and when the statement arrives she pays it in full from savings.
7:54 Interest charged: zero.
7:56 Her empty credit report gets its first entry, an on-time payment in full,
8:01 the first data point her credit score will ever be built from.
8:04 It is the same card that costs thirty-four dollars on the minimum-payment path;
8:09 used this way it costs nothing and opens the file.
8:12 After the purchase: twenty dollars left, then five more Friday transfers make two
8:17 hundred twenty dollars by festival week, against one hundred ninety dollars of
8:21 travel share and spending still to pay.
8:24 About thirty dollars of slack.
8:27 The strategy card generalizes what she did.
8:31 First, the why: every loan payment is income that cannot be saved or spent on
8:36 anything else, and larger debts or higher interest rates mean higher monthly
8:40 payments.
8:41 Borrowers land in trouble when income drops or when payments outgrow what they
8:46 can pay.
8:48 Then the moves.
8:49 Repay the highest-rate debt first, which usually means credit card balances before
8:54 anything cheaper.
8:56 Pay every bill on time, because on-time entries are what a score is made of.
9:01 Keep card balances low and the number of cards small.
9:05 Compare lenders before borrowing, because shopping the terms wins lower rates and
9:10 lower fees. And on a major purchase like a home or a car, make a down payment:
9:16 paying part of the price from savings shrinks the loan,
9:20 which shrinks every payment after it.
9:23 When debt still turns unmanageable and consequences like property seizure loom,
9:28 debt management assistance exists, and bankruptcy is a legal process that
9:33 eliminates some debts and sets a repayment plan for the rest.
9:37 It is a real last resort with lasting costs, and the five moves on this card
9:42 exist so you never reach it.
9:46 That's Topic 3.2.
9:48 Sadie's half of the unit is complete: a saver by system in 3.1,
9:52 a borrower who almost was, and a credit file exactly one on-time payment old.
9:58 From here the unit changes scale, from a person's money to a business's books.
10:03 A person can hold her whole financial life in one account,
10:06 one card, and one report.
10:08 A business has money moving every day it is open, owed in every direction,
10:13 and somebody has to write all of it down before an owner,
10:16 a lender, or a tax office can read what any of it means.
10:20 Who does that recording, and who uses it, is Topic 3.3,
10:24 Accounting and Financial Management.
10:27 If this helped, a like tells YouTube to show it to more first-cohort students,
10:31 and subscribing gets you the whole course, in order,
10:34 as it's built.
10:35 And the free AP Business vocab pack, every key term from all five units,
10:39 is waiting at mamako.app, link below.
10:42 The 3.2 practice video is ready next.
10:45 See you next time.

Why consumers borrow

Consumers borrow when what they want costs more than current income plus accumulated savings will cover. The standard examples are large: a car, a house, college tuition. The same logic runs at small scale whenever a purchase arrives before the savings do. Borrowing also happens for three softer reasons: an emergency has to be covered, a household would rather buy something than drain its savings, or the credit is simply convenient, because one tap settles a checkout.

Every version carries the same consequence. Borrowing creates a personal liability, which is debt, and the borrower repays with interest. What that interest costs depends on four things: which lender is involved, what kind of loan it is, how large the balance is, and what the borrower's credit history shows. Those four inputs are why two people can borrow the same $260 and pay very different totals.

One split sorts every loan in the topic. A secured loan is backed by collateral, an asset the lender can take if payments stop, which is why car loans and mortgages price below other borrowing. An unsecured loan has nothing behind it except a promise to repay, and that missing asset is why credit cards and general consumer loans are priced above the secured kind.

Who lends, and at what price

Lenders line up by price, and the ordering is not arbitrary. Commercial banks and credit unions are usually the cheapest and always the pickiest, and their loan money is literally the deposits savers place with them. That is the quiet link between this topic and the last one: savers fund borrowers, and one institution runs both sides.

Banks and credit unions: lowest rates, strictest standards, funded by deposits.
Credit card companies and retail store cards: unsecured lending, priced accordingly.
Mortgage and auto lenders: cheaper than cards because property secures the loan.
Alternative financial services: payday storefronts, check cashing, and instant tax refund advances, the most expensive row of all.

The last row is expensive for a structural reason rather than a moral one. Its customers are the applicants every other row rejected, and because price tracks risk, a lender absorbing the most defaults has to charge the most in order to survive them. Understanding that mechanism is what lets a student predict, rather than memorize, which lender in a question is the costly one.

Pricing the offers before committing

Three financing paths for the same purchase produce three different totals, and running all three before deciding is the skill the topic is built on. A cash purchase costs the sticker price and nothing else. A pay-in-four plan splits the same price into four payments two weeks apart, charges no interest when every payment lands on time, and adds a late fee for each one that does not. The split rearranges the schedule and leaves the price alone, and the balance becomes a liability the moment it is accepted.

A credit card path is the one that changes the number. A 24% APR is 2% a month, so a $260 balance repaid at $25 a month runs twelve months and costs $294.44 in total, which is $34.44 of interest bought in exchange for skipping two weeks of waiting. The minimum payment is what makes a small balance survive that long.

Every one of those numbers is published in advance. Consumer protection law obliges a lender to spell out credit terms plainly and in full ahead of any commitment, and the same body of law also governs how debts may be collected and forbids discriminatory lending. The disclosure box exists so that the true cost can be computed before the commitment, which only works if it is actually read.

How a lender judges creditworthiness

Every lender faces default risk, the chance a borrower never repays, so a lender prefers an applicant who carries little existing debt, holds solid income and savings, and can show that past payments arrived on schedule. A lender that accepts riskier applicants covers the extra defaults by charging more, which is the same mechanism that ordered the lineup above.

To size up an applicant a lender collects income, savings, existing debts, and a credit report, the record of past use of credit. Reports are compiled by credit bureaus, also called credit reporting agencies, and they add an entry every time someone deals with a financial institution, whether that is opening an account, taking out a loan, applying for a card, or making a payment.

The report carries a credit score summarizing that history, and the most instructive case is the applicant who has none. Two years of steady paychecks prove that someone earns; they prove nothing about repayment, because income history is not credit history. A report with no borrowing on it gives a lender nothing to price. The stakes also outlast any single purchase, because that same file can later be requested by lenders, by landlords, by employers, by insurance companies, and by government agencies.

Using credit without paying for it

There is a version of borrowing that costs nothing and still builds a record. Buy with money already saved, route the purchase through a starter card, then pay the statement in full when it arrives. Interest charged is zero, because interest only applies to a balance carried past the statement date, and the previously empty file gains its first on-time entry.

The same card that would cost $34.44 on the minimum-payment path costs nothing used this way. That is the whole lesson about credit compressed into one purchase: the product is a tool or a trap depending on whether the cash exists first. Keeping the balance far below the credit limit matters too, because light utilization is one of the levers that builds a score.

A strategy for managing credit and debt

High debt harms a household's financial condition for a simple reason. A loan payment consumes income that is then unavailable for saving or for anything else, and both bigger balances and steeper rates push that payment upward. Borrowers get into trouble when income drops or when payments outgrow what they can pay, which are the two failure modes the course names.

Repay the highest-rate debt first, which usually means card balances before anything cheaper.
Settle every bill by its due date, since a score is assembled out of payments that arrived when promised.
Keep card balances low and the number of cards small.
Compare lenders before borrowing, since shopping terms wins lower rates and lower fees.
Make a down payment on a major purchase, because paying part from savings shrinks the loan and every payment after it.

When debt turns genuinely unmanageable and consequences such as property seizure appear, debt management assistance exists, and bankruptcy is the legal route that wipes out some obligations while scheduling repayment of the others. It is genuinely available and genuinely a last resort, with costs that persist for years, and the five moves above exist so that it is never reached.

Essential knowledge covered on this page

Learning objective	Essential knowledge	Section
3.2.A Reasons consumers borrow and available funding sources	3.2.A.1, 3.2.A.2, 3.2.A.3, 3.2.A.4, 3.2.A.5	Why consumers borrow, Who lends, Pricing the offers
3.2.B How lenders evaluate creditworthiness	3.2.B.1, 3.2.B.2, 3.2.B.3, 3.2.B.4	How a lender judges creditworthiness
3.2.C Strategies to manage debt and use of credit	3.2.C.1, 3.2.C.2, 3.2.C.3, 3.2.C.4, 3.2.C.5, 3.2.C.6	Using credit without paying for it, A strategy for managing credit and debt

CED essential knowledge for Topic 3.2

Worked Examples

The true cost of a $260 balance at 24% APR

Compute the total repaid and the interest paid when a balance is carried at a stated APR and a fixed monthly payment.

A student card offers 24% APR. Putting a $260 pass on it and paying $25 a month, work out how long the debt lasts and what it costs in total.

Balance charged: $260
Annual percentage rate: 24%
Monthly payment: $25

1. Convert the APR into a monthly rate
Card interest is applied monthly, so divide the annual rate by twelve. 24% over 12 months is 2% a month.
$r_{m} = \frac{0.24}{12} = 0.02$
2. Write the rule for one month
Each month the balance grows by 2% and then the payment is subtracted. In month one, $260 times 1.02 is $265.20, and $265.20 minus $25 leaves $240.20.
$B_{n + 1} = B_{n} \times 1.02 - 25$
3. Repeat until the balance clears
Applying the same rule month after month, the balance falls below $25 during the twelfth month, so eleven full payments of $25 are made and the final payment is $19.44.
4. Add up everything paid
Eleven payments of $25 is $275, and adding the final $19.44 gives $294.44.
5. Separate the interest from the debt
Subtract the amount originally borrowed. $294.44 minus $260 is $34.44 of interest.

Check answer

Answer
$294.44 in total, $34.44 of it interest. Carrying the balance stretches a single purchase across a year and adds $34.44 to its price.

Why it matters
Notice what the $34.44 actually bought: about two weeks of not waiting. Stating the cost of borrowing as a total rather than a rate is what makes that trade visible.

Pay-in-four: the price holds, the schedule moves

Show that an interest-free installment plan changes the timing of a cost rather than its size, and price the fee risk.

A pay-in-four checkout splits the $260 pass into four payments, the first taken at checkout and the other three every two weeks after it, with no interest if every payment lands on time and a $10 late fee for each one that does not. The third payment falls in the week the $90 travel share is due, and the fourth falls in the week the $100 of spending money is due.

Purchase price: $260
Number of payments: 4
First payment: taken at checkout
Interval: every 2 weeks
Late fee per missed payment: $10

1. Find the payment
Divide the price by the number of installments. $260 over 4 is $65.
2. Confirm the price is unchanged
Add the four payments back up. Four times $65 is $260, exactly the sticker price, so the plan itself adds nothing when it is paid perfectly.
3. Lay each payment date against that week's other obligations
With the first payment taken at checkout, the four land at weeks 0, 2, 4, and 6. Week 4 carries payment three of $65 plus the $90 travel share, so $155 comes due that week. Week 6 carries payment four of $65 plus the $100 of spending money, so $165 comes due that week.
4. Price the failure case
Missing both of the colliding payments costs two fees. Two times $10 is $20, so the $260 purchase becomes $280.

Check answer

Answer
$260 if perfect, $280 with two missed payments. The plan rearranges when money is owed and leaves the price alone, provided nothing slips.

Why it matters
A zero-interest plan is not a zero-risk plan. The cost hides in the calendar, so the honest way to evaluate one is to write the payment dates next to every other obligation already sitting in those weeks.

Rebuilding a savings balance after a planned purchase

Track a savings balance through a withdrawal and back up to the remaining obligations.

By week 7 the automated transfers have built the fund to $280, and the $260 pass is bought with cash already saved. Five weeks of saving remain before the festival, and $90 of travel share plus $100 of spending money are still to be paid.

Balance at week 7: $280
Pass price: $260
Weeks of saving remaining: 5
Weekly transfer: $40
Travel share still owed: $90
Spending money still owed: $100

1. Subtract the purchase
Take the pass out of the balance. $280 minus $260 leaves $20.
2. Add the remaining transfers
Five more Fridays at $40 each add $200. Adding that to the $20 remaining gives $220 by festival week.
3. Total the costs still to come
Add the two outstanding items. $90 plus $100 is $190.
4. Compare the balance against the obligations
Subtract what is owed from what is saved. $220 minus $190 leaves about $30.

Check answer

Answer
about $30 of slack. The fund reaches $220 against $190 of remaining costs, finishing roughly $30 ahead.

Why it matters
The cushion built into the original transfer is what absorbed an early purchase without breaking the plan. A savings plan with no slack has no room for the thing that always happens.

Practice Questions

6 questions. Nothing here is recorded or scored.

Question 13.2.A.2
Alina Voss
Alina Voss, eighteen, needs a car to reach her community college classes and her weekend job. The used car she wants costs 3,600 dollars, and her savings hold 900. She is comparing four ways to pay: financing arranged by the dealer, an auto loan from her credit union, a no-interest family loan from her cousin, and her own credit card, with a 2,000-dollar limit and a 26 percent APR. The credit union quotes a lower rate than the dealer but requires a down payment, and it asks for proof of income, her savings balance, and permission to pull her credit report.
Which of the following best explains why the credit-union auto loan would carry a lower interest rate than Alina's credit card?
- A.Credit unions are nonprofit, so state law caps the rate they charge on car loans.
- B.The car secures the auto loan, so the lender can recover the vehicle on default.
- C.Auto loans are priced by the vehicle's age, so a used car earns a lower rate.
- D.The card's 26 percent rate is high because its 2,000-dollar limit is small.
Check answerHide answer
Answer: B
A.
The invented law. Credit unions often do charge less, but no law sets their rates; the collateral does the work here.
B.
Correct. Borrowing creates a liability repaid with interest, and the interest rate prices the lender's risk. A loan that buys an asset able to serve as collateral, a car or a house, is a secured loan: if the borrower defaults, the lender takes the collateral and recovers much of its money, so lower risk prices as a lower rate. The card is unsecured, backed only by Alina's promise, so it charges more.
C.
Lenders do look at what an asset is worth when they size a secured loan, but the gap the question asks about runs between a secured loan and an unsecured card. Collateral prices that gap; the car's model year does not.
D.
The card's rate is high because the debt is unsecured, not because the limit is small. A credit limit sizes how much can be borrowed; the rate prices the lender's risk of not being repaid.
Question 23.2.B.1, 3.2.B.2
Which of the following best describes the purpose of the credit union's requests for proof of income, her savings balance, and her credit report?
- A.A legal formality the state imposes on borrowers under twenty-one who finance a car.
- B.A signal that the credit union would rather not lend to a first-time borrower.
- C.A confirmation of the used car's resale value, since that car will secure the loan.
- D.An evaluation of Alina's creditworthiness, the lender's estimate of default risk.
Check answerHide answer
Answer: D
A.
No such formality exists in the framework, and the requests have nothing to do with Alina's age. Lenders ask every borrower for this file, because every borrower carries default risk the lender must price.
B.
The requests are how a lender says maybe, not no. Screening a first-time borrower is the standard path to approving one; a lender that preferred not to lend would simply decline.
C.
This stretches the collateral logic too far. The car's value matters to a secured loan, but every item on this list is about Alina, because the lender prices the borrower whether or not collateral exists.
D.
Correct. Every lender faces default risk, the chance that a borrower never repays, so lenders size up each borrower before naming a rate. The file is exactly what the credit union asked for: income, savings, existing debt, and a credit report of her past use of credit, compiled by a credit bureau. A strong file earns approval and a better rate; a risky file earns a higher rate or a no.
Question 33.2.A.5
The dealer's financing paperwork includes a boxed section stating the loan's annual percentage rate, all fees, and the total amount Alina would repay. Which of the following best explains why that box appears?
- A.Consumer protection laws require lenders to state credit terms clearly to borrowers.
- B.Dealers add the box voluntarily, because clear terms attract more borrowers than fine print.
- C.Credit bureaus require the box before they will add the loan to a borrower's credit report.
- D.Disclosure boxes are required only on secured loans larger than 5,000 dollars.
Check answerHide answer
Answer: A
A.
Correct. Consumer protection laws require lenders to state credit terms clearly and explicitly before a borrower commits; the same body of law governs debt collection tactics and prohibits discriminatory lending. The box is where a borrower computes the true cost in advance, which is what lets Alina compare the dealer against the credit union.
B.
This turns a legal requirement into a courtesy. Disclosure does not depend on the dealer's goodwill.
C.
This misplaces the credit bureau, which records credit use and writes no loan contracts.
D.
The disclosure requirement is not limited by loan size or by whether collateral backs the loan. Consumer protection law requires clear statement of credit terms to borrowers generally, and this loan would qualify either way.
Question 43.2.C.4
A twenty-year-old with a low credit score wants to raise it over the next two years. Which of the following strategies best supports that goal?
- A.Opening several new credit cards at once to show lenders more available credit.
- B.Carrying a balance on one card each month so the lender earns steady interest.
- C.Paying bills on time, paying down debt, and minimizing credit card use.
- D.Switching banks so that her old credit report stops following the new accounts.
Check answerHide answer
Answer: C
A.
Opening several new cards adds available credit but works against the goal: a score reflects past use of credit, and a burst of new accounts adds no history of on-time payment while inviting more debt. More open credit is not the same as a better record.
B.
The most widespread credit myth. The report records whether payments arrive on time, and interest paid buys no extra history; a balance paid in full on time builds the same record at zero cost.
C.
Correct. A credit score reflects past use of credit, so the score rises when the record improves, and the framework names three moves: pay bills on time, pay off existing debt, and minimize credit card use. A score is built from years of small, clean entries.
D.
This misunderstands the report. Bureaus compile it from her activity at every financial institution, so the file follows the consumer, whichever bank she uses.
Question 53.2.A.2, 3.2.C.5
Alina's Loan Comparison
The table prices Alina's four options for paying for the 3,600-dollar car.
Option | Down payment | Repayment | Total repaid after down payment | Notes Dealer financing | None | 36 payments of $122 | $4,392 | Credit-union loan | $360 | 36 payments of $101 | $3,636 | Family loan | None | 24 payments of $150 | $3,600 | Never reported to a credit bureau Credit card | None | 26% APR | | $2,000 limit, below the car's price Which conclusion is supported by the table?
- A.Dealer financing is the cheapest path because it asks for no cash up front.
- B.The family loan is the strongest choice for building Alina's credit history.
- C.The dealer loan and the credit-union loan charge about the same total interest.
- D.The down payment and the lower rate halve the credit-union loan's interest cost.
Check answerHide answer
Answer: D
A.
This fails the supported-by-data rule. No cash up front is true, but cheapest is false: the dealer's all-in cost is 4,392 dollars against the credit union's 3,996.
B.
This contradicts the table's own line. A loan never reported to a credit bureau builds no credit history at any price.
C.
The two interest totals are nowhere near the same. The dealer collects 792 dollars of interest on the full 3,600 lent, while the credit union collects 396 on its smaller loan; one is exactly double the other.
D.
Correct. Compute both interest costs. The dealer lends the full 3,600 and collects 4,392: 792 dollars of interest. The credit union lends 3,240, the price minus the down payment, and collects 3,636: 396 dollars of interest, exactly half. Comparing lenders found the lower rate, and the down payment shrank the loan, so every payment after it shrank too.
Question 63.2.A.4, 3.2.B.1
A borrower needs 300 dollars for two weeks, until the next paycheck arrives. Which of the following best identifies the most expensive source for that money?
- A.A personal loan from the borrower's credit union.
- B.A payday loan taken at a storefront lender.
- C.An auto loan secured by the borrower's own car.
- D.A credit card charge paid off at the statement.
Check answerHide answer
Answer: B
A.
The other end of the lineup. Banks and credit unions lend out the deposits savers place with them and screen borrowers carefully, usually the cheapest source and the hardest yes.
B.
Correct. Payday loans, check-cashing services, and instant tax refunds are alternative financial services, the most expensive lending in the market, because they serve the borrowers other lenders turn away, and the more default risk a lender absorbs, the more it charges. Two weeks of payday fees, restated as an annual rate, can dwarf even a high card APR.
C.
A secured loan sits near the cheap end of the lineup, because the collateral lowers the lender's risk. It is also the wrong tool for a two-week gap, but on price alone it cannot be the most expensive source here.
D.
This looks expensive because card APRs run high, but the mechanism decides: a charge paid off at the statement accrues no interest at all, making it the cheapest borrowing on this list.

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7 common mistakes on 3.2

The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.

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Essential knowledge covered

3.2.A.1 · 3.2.A.2 · 3.2.A.3 · 3.2.A.4 · 3.2.A.5 · 3.2.B.1 · 3.2.B.2 · 3.2.B.3 · 3.2.B.4 · 3.2.C.1 · 3.2.C.2 · 3.2.C.3 · 3.2.C.4 · 3.2.C.5 · 3.2.C.6

3.2 Borrowing, Credit, and Debt

Why consumers borrow

Who lends, and at what price

Pricing the offers before committing

How a lender judges creditworthiness

Using credit without paying for it

A strategy for managing credit and debt

Essential knowledge covered on this page

Worked Examples

The true cost of a $260 balance at 24% APR

Pay-in-four: the price holds, the schedule moves

Rebuilding a savings balance after a planned purchase

Key Terms

Practice Questions

7 common mistakes on 3.2

Essential knowledge covered