PrepTest 129, Section 2, Question 3
MetroBank made loans to ten small companies, in(51 more words not shown)
Which one of the following,(13 more words not shown)
- AThe number of(12 more words not shown)
- BSeveral of the(9 more words not shown)
- CMost banks offer(12 more words not shown)
- DOf the ten(17 more words not shown)
- EFor some loans(14 more words not shown)
Reading the argument
Every scheduled monthly payment goes up a little. If all ten borrowers keep making those payments for the full five years, I would expect the average payment to go up too. So why does the average payment the bank actually receives go down?
Could some businesses have paid their loans off early? A business might earn enough money to clear its debt rather than keep paying for five years. Once that loan is paid off, there are no more monthly payments from that borrower. An increasing payment schedule does not guarantee that the borrower will remain on it until the end.
What we’re looking for
That is the kind of explanation I want for this discrepancy. Keep both facts: these ten loans had increasing scheduled payments, yet the average payment received decreased. We need something about what happened to these loans, not a reason to reject their stated terms.
Working the answers
- A
New loans are outside the group we are examining. The average concerns these ten loans, so an increase in the number of other borrowers does not explain why payments from this group ended up lower.
- B
Borrowing from another bank does not tell us what happened to the MetroBank loans. Perhaps a business used the new money to repay MetroBank, but B never says that. The mere existence of another loan does not explain a decrease in the average payment received here.
- C
What most banks usually offer does not explain the outcome for these ten particular loans. We already know their amounts and payment schedules. An industry comparison between loans above and below $100,000 adds no explanation of why this group's average fell.
- DCorrect
The largest loans were paid off early, so the bank stopped receiving their ongoing monthly payments. That gives us the early-payoff explanation and identifies the loans whose disappearance can pull the average down.
Imagine that some loans produce large monthly payments while the remaining loans produce much smaller ones. Remove the large payments, and the average among the payments still arriving can fall even while each remaining payment rises slightly. The increasing schedules and decreasing average can therefore coexist.
- E
Some MetroBank loans can have decreasing payments, but the passage specifically says these ten had increasing schedules. E could describe other loans. It cannot explain our ten by replacing their stated payment terms with different ones.
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