Which statement is true of both mortgages and auto loans? They are riskier than student loans for lenders. They do not require a minimum payment. They are secured loans and generally require a down payment. They have higher interest rates than credit cards.
The correct answer and explanation is:
Correct Answer: They are secured loans and generally require a down payment.
Explanation (300 words):
Both mortgages and auto loans are types of secured loans, which means they are backed by collateral. In the case of a mortgage, the collateral is the home itself. If the borrower fails to make payments, the lender has the right to foreclose on the property to recover the debt. Similarly, with an auto loan, the car is the collateral. If payments are not made, the lender can repossess the vehicle. This security reduces the risk for lenders, making secured loans safer compared to unsecured loans such as credit cards or personal loans.
Another common feature of both mortgages and auto loans is that they generally require a down payment. A down payment is an upfront amount the borrower pays at the time of purchase. For mortgages, this can range from 3% to 20% or more of the home’s value. For auto loans, the recommended down payment is typically around 10% to 20% of the vehicle’s price. A down payment reduces the loan amount and demonstrates the borrower’s financial commitment, which lowers the lender’s risk.
The other answer choices are incorrect for the following reasons:
- Mortgages and auto loans are less risky than student loans for lenders because they are secured, while most student loans are unsecured.
- Both types of loans require a minimum monthly payment based on the loan balance, interest rate, and term.
- Mortgages and auto loans typically have lower interest rates than credit cards, not higher. Credit cards are unsecured and carry a greater risk of default, so they often come with higher interest rates.
In summary, mortgages and auto loans are secured by assets and usually require a down payment, which distinguishes them from many other forms of consumer debt.