RMA Credit Risk Certification Practice Exam

What determines the repayment term of a long-term loan?

The useful life of the asset and cash flow available to service the debt The company's marketing plan The current year's tax rate The number of employees

Correct Answer:

The useful life of the asset and cash flow available to service the debt

Explanation:

The repayment term is set by how long the asset will generate value for the business and how much cash flow is available to service the debt. If an asset has a useful life of ten years, the loan term should align with that horizon so payments are supported while the asset remains productive. The borrower’s cash flow capability—often evaluated through debt-service coverage and other cash-flow metrics—must be enough to cover principal and interest throughout the term. The other factors—marketing plans, current tax rate, or the number of employees—affect profitability or operations but do not directly determine how long a loan should be repaid.

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