Question

Which best describes the purpose of the 20-10 Rule?

a.to decide whether an individual can afford a loan
b.to evaluate financial institutions when choosing a bank
c.to calculate the interest rate and fees on a credit card
d. to set the amount of time provided for a short-term loan

Answer 1

The purpose of the 20-10 Rule is to decide whether an individual can afford a loan by setting limits on the total monthly debt payments based on a percentage of their income.

Step-by-step explanation:

The purpose of the 20-10 Rule is to decide whether an individual can afford a loan. The rule states that a person's total monthly debt payments, including the new loan payment, should not exceed 20% of their monthly income, and their total monthly debt payments, including the new loan payment and housing costs, should not exceed 10% of their monthly income.

For example, if someone earns $4000 per month, their total monthly debt payments should not exceed $800 (20% of $4000), and their total monthly debt payments and housing costs should not exceed $400 (10% of $4000).