Who is likely to pay the lowest finance charge: Scott, who borrowed for a vacation, or Eric, who borrowed for a truck?

Who is likely to pay the lowest finance charge: Scott, who borrowed for a vacation, or Eric, who borrowed for a truck?

• A. Scott will pay less because of the vacation
• B. Eric will pay less because the truck is collateral
• C. Both will pay the same
• D. Neither will qualify for a loan

Answer: (B)

The most likely scenario is that Eric will pay a lower finance charge because he borrowed money to purchase a truck, which serves as collateral. When a loan is secured by collateral, the lender takes less risk because they can reclaim the asset (in this case, the truck) if the borrower defaults on the loan. This reduced risk often translates into lower interest rates and finance charges for the borrower. In contrast, Scott’s loan for a vacation is typically considered an unsecured loan, meaning there is no collateral backing it. Unsecured loans are generally riskier for lenders, which can lead to higher interest rates and finance charges to compensate for that risk. Thus, the presence of collateral in Eric’s situation makes it more likely that he will incur lower finance charges compared to Scott.

The most likely scenario is that Eric will pay a lower finance charge because he borrowed money to purchase a truck, which serves as collateral. When a loan is secured by collateral, the lender takes less risk because they can reclaim the asset (in this case, the truck) if the borrower defaults on the loan. This reduced risk often translates into lower interest rates and finance charges for the borrower.

In contrast, Scott’s loan for a vacation is typically considered an unsecured loan, meaning there is no collateral backing it. Unsecured loans are generally riskier for lenders, which can lead to higher interest rates and finance charges to compensate for that risk.

Thus, the presence of collateral in Eric’s situation makes it more likely that he will incur lower finance charges compared to Scott.