Alberta General Insurance Level 1 Practice Exam

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Why is insurance considered an aid to credit?

  1. It increases loan interest rates

  2. It decreases the need for loans

  3. It is necessary for obtaining loans for large purchases

  4. It substitutes for collateral

The correct answer is: It is necessary for obtaining loans for large purchases

Insurance is considered an aid to credit because it is necessary for obtaining loans for large purchases. Option A is incorrect because insurance does not increase loan interest rates, it actually helps mitigate the risk for lenders and can potentially result in lower interest rates. Option B is incorrect because insurance does not decrease the need for loans, it simply provides added security for lenders. Option D is incorrect because while insurance can provide some level of collateral, it is not a substitute for collateral. Insurance primarily helps protect lenders in case the borrower is unable to repay the loan.

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