Skip to content

Quiz: Major Purchases and Loans

Test your understanding of major purchases and loan concepts.

1. You're considering a $20,000 auto loan. Which term length will result in the lowest total cost?

  1. 72 months (lower monthly payment)
  2. 60 months (moderate monthly payment)
  3. 48 months (higher monthly payment)
  4. All term lengths cost the same total amount
Show Answer

The correct answer is C. Shorter loan terms result in less total interest paid. A 48-month loan will have higher monthly payments but significantly lower total interest than 60 or 72-month loans. While a 72-month loan makes the monthly payment more affordable, you'll pay thousands more in interest over the life of the loan and stay in debt longer. Best practice: Keep auto loans to 48-60 months maximum.

Concept Tested: Loan Term Length

See: Loan Term Length Impact

2. A new car typically loses what percentage of its value in the first year?

  1. 5-10%
  2. 20-30%
  3. 40-50%
  4. 60-70%
Show Answer

The correct answer is B. New cars typically depreciate 20-30% in the first year, with 9-11% lost the moment you drive off the lot. After three years, a new car is usually worth about 60% of its original price. This steep depreciation is why buying a 2-3 year old used vehicle often provides better value—you let the first owner absorb the worst depreciation while still getting a modern, reliable car.

Concept Tested: Vehicle Depreciation

See: Understanding Depreciation

3. What does "total cost of ownership" include beyond the purchase price?

  1. Only the loan interest
  2. Only insurance and fuel
  3. Purchase price, loan interest, insurance, fuel, maintenance, taxes, and depreciation
  4. Only the monthly payment amount
Show Answer

The correct answer is C. Total cost of ownership (TCO) includes all costs of owning a vehicle over time: purchase price, loan interest, insurance, fuel, maintenance and repairs, registration/taxes, and depreciation (loss of value). Smart buyers evaluate TCO, not just the sticker price or monthly payment. Two cars with the same purchase price can have vastly different ownership costs based on fuel economy, insurance rates, and reliability.

Concept Tested: Total Cost of Ownership

See: Total Cost of Ownership

4. What is the "price-to-rent ratio" used for when deciding whether to rent or buy a home?

  1. To calculate your monthly mortgage payment
  2. To determine if buying or renting is more financially attractive in your market
  3. To estimate property taxes
  4. To calculate your down payment amount
Show Answer

The correct answer is B. The price-to-rent ratio (home price divided by annual rent for a comparable property) helps determine whether buying or renting is financially better in your market. A ratio below 15 suggests buying is likely cheaper, 15-20 depends on other factors, and above 20 suggests renting is likely cheaper. This ratio varies significantly by location and helps you make informed housing decisions.

Concept Tested: Renting vs Buying

See: Rent vs Buy Decision

5. What is the main advantage of a fixed-rate mortgage over an adjustable-rate mortgage (ARM)?

  1. Lower initial interest rate
  2. Predictable payment that never changes
  3. Easier to qualify for
  4. No closing costs
Show Answer

The correct answer is B. A fixed-rate mortgage maintains the same interest rate and payment for the entire loan term (15 or 30 years), providing predictability and protection from rising interest rates. ARMs have lower initial rates (A is true for ARMs, not fixed) but can increase significantly after the fixed period ends. For most first-time buyers planning to stay long-term, fixed-rate mortgages are the safer choice.

Concept Tested: Fixed-Rate Mortgage

See: Fixed-Rate Mortgages

6. What is the primary benefit of making a 20% down payment on a home?

  1. You get a lower interest rate and avoid PMI (private mortgage insurance)
  2. You don't need to get the home inspected
  3. You can close faster
  4. You qualify for an FHA loan
Show Answer

The correct answer is A. Making a 20% down payment on a conventional loan eliminates the requirement for PMI (private mortgage insurance), which can cost $100-200+ per month. It also demonstrates financial strength, often resulting in better interest rates. PMI protects the lender (not you) and adds thousands to your costs over time. While 20% down is ideal, many first-time buyers purchase with less and refinance to remove PMI later.

Concept Tested: Down Payment

See: Down Payment Impact

7. What are closing costs?

  1. The monthly mortgage payment
  2. Fees and expenses paid when finalizing a mortgage, typically 2-5% of the loan amount
  3. The down payment amount
  4. Real estate agent commissions
Show Answer

The correct answer is B. Closing costs are the various fees paid when finalizing a mortgage, including loan origination fees, appraisal, title insurance, attorney fees, prepaid property taxes and insurance, and recording fees. These typically total 2-5% of the loan amount ($6,000-$15,000 on a $300,000 loan) and catch many first-time buyers by surprise. You need to budget for closing costs in addition to your down payment.

Concept Tested: Closing Costs

See: Understanding Closing Costs

8. You're offered two auto loans for $25,000. Loan A: 5% APR for 48 months. Loan B: 8% APR for 48 months. How much more will you pay in total with Loan B?

  1. About $750 more
  2. About $1,800 more
  3. About $3,000 more
  4. The same amount (APR doesn't affect total cost)
Show Answer

The correct answer is B. The difference in APR significantly affects total cost. Loan A at 5% results in about $2,762 total interest. Loan B at 8% results in about $4,540 total interest—approximately $1,778 more for the same car! This demonstrates why getting pre-approved for a loan with good credit before shopping is so important. Even small differences in interest rates add up to thousands of dollars over the loan term.

Concept Tested: Loan Interest Rates

See: Interest Rate Impact

9. When should comparison shopping for mortgages include requesting Loan Estimates from multiple lenders?

  1. Never—you should just use your bank
  2. After you've already signed a purchase agreement
  3. Before making an offer, so you know what rates and costs are available
  4. Comparison shopping isn't allowed for mortgages
Show Answer

The correct answer is C. You should compare offers from at least three lenders before making decisions, requesting standardized Loan Estimates that show interest rates, fees, and closing costs. Rates and fees can vary by $3,000-$5,000+ between lenders for the same loan amount. Getting pre-approved and comparing lenders before house hunting gives you negotiating power and ensures you get the best deal. Multiple credit inquiries within 14 days count as one for credit score purposes.

Concept Tested: Comparison Shopping

See: Mortgage Shopping Strategy

10. What is your most powerful negotiation tool when buying a car or house?

  1. Offering to pay cash
  2. Being willing to walk away
  3. Demanding a discount
  4. Telling them it's your first purchase
Show Answer

The correct answer is B. Your willingness to walk away from a deal is your most powerful negotiation leverage. If the seller knows you'll accept whatever they offer, you have no leverage. When you're genuinely prepared to leave and find alternatives, sellers are more likely to negotiate seriously. This applies to cars, homes, and any major purchase. You must mean it—walking away is only powerful if you'll actually do it.

Concept Tested: Negotiation Skills

See: Negotiation Principles