Chapter 14 - Installment buying, rule of 78, and revolving charge credit cards. In this chapter, the learning objectives are: Calculate the amount financed, finance charge, and deferred payment, calculate the estimated APR by table lookup, calculate the monthly payment by formula and by table lookup, calculate the finance charges on revolving charge credit card accounts.
Chapter 14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives LU14.1 Cost of Installment Buying Calculate the amount financed, finance charge, and deferred payment Calculate the estimated APR by table lookup Calculate the monthly payment by formula and by table lookup 142 #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives Paying Off Installment Loan before LU14.2 Due Date Calculate the rebate and payoff for Rule of 78 143 #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives LU14.3 Revolving Charge Credit Cards Calculate the finance charges on revolving charge credit card accounts 144 Cost of Installment Buying Amount financed (AF) the amount actually borrowed AF = Cash Price Down Payment Finance charge (FC) the interest charge FC = Total of all Amount monthly payments financed 145 Deferred payment price (DPP) the total of all monthly payments plus the down payment DPP = Total of all + Down monthly payments payment Installment loan a loan paid of in a series of equal periodic payments. Payments include interest and principal Cost of Installment Buying Mary Wilson would like to buy a boat that cost $9,345. If she puts down $300 she can finance the balance for 60 months at 10.5% (monthly payment = $194.38). Calculate the amount financed, finance charge, and deferred payment price 146 Amount financed = Cash price Down payment $9,045 = $9,345 $300 Finance Charge = Total of all Amount monthly payments financed $2,617.80 = $11,662.80 $9,045 ($194.38 x 60) Deferred payment = Total of all + Down Price monthly payment payments $11,962.80 = $11,662.80 + $300 Calculating APR by Table Step 3. When you find the number of payments you are looking for, move to the right and look for the two numbers closest to the table lookup number. This will indicate the APR. Step 2. Go to APR Table 14.1. At the left side of the table are listed the number of payments that will be made Step 1. Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor 147 Annual Percentage Rate (APR) Truth in Act Lending e b t s u m AP R to accurate st the neare /4 o f % Calculating APR rate by table Finance charge x $100 = Table 14.1 Amount financed lookup # $2,617.80 x 100 = $28.94 $9,045 Between 10.25% 10.50% 148 Table 14.1 Annual Percentage Rate Table per $100 Annual percentage rate table per $100 (Partial) # of Payments 10.00% 149 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00% 12.25% 12.50% 36 16.16 16.58 17.01 17.43 17.86 18.29 18.71 19.14 19.57 20.00 20.43 37 16.62 17.06 17.49 17.93 18.37 18.81 19.25 19.69 20.13 20.58 21.02 38 17.08 17.53 17.98 18.43 18.88 19.33 19.78 20.24 20.69 21.15 21.61 39 17.54 18.00 18.46 18.93 19.39 19.86 20.32 20.79 21.26 21.73 22.20 40 18.00 18.48 18.95 19.43 19.90 20.38 20.86 21.34 21.82 22.30 22.79 41 18.47 18.95 19.44 19.93 20.42 20.91 21.40 21.89 22.39 22.88 23.38 42 18.93 19.43 19.93 20.43 20.93 21.44 21.94 22.45 22.96 23.47 23.98 43 19.40 19.91 20.42 20.94 21.45 21.97 22.49 23.01 23.53 24.05 24.57 44 19.86 20.39 20.91 21.44 21.97 22.50 23.03 23.57 24.10 24.64 25.17 45 20.33 20.87 21.41 21.95 22.49 23.03 23.58 24.12 24.67 25.22 25.77 46 20.80 21.35 21.90 22.46 23.01 23.57 24.13 24.69 25.25 25.81 26.37 47 21.27 21.83 22.40 22.97 23.53 24.10 24.68 25.25 25.82 26.40 26.98 48 21.74 22.32 22.90 23.48 24.06 24.64 25.23 25.81 26.40 26.99 27.58 49 22.21 22.80 23.39 23.99 24.58 25.18 25.78 26.38 26.98 27.59 28.19 50 60 22.69 27.48 23.29 28.22 23.89 28.96 24.50 29.71 25.11 30.45 25.72 31.20 26.33 31.96 26.95 32.71 27.56 33.47 28.18 34.23 28.80 34.99 Calculating the Monthly Payment by Formula The pickup truck advertisement on page 340 showed a $194.38 monthly payment. We can check this by formula and by table lookup Finance charge + Amount financed Number of payments of loan $2,617.80 + $9,045 60 $194.38 1410 Calculating the Monthly Payment by Table Step 3. Multiply the quotient in Step 1 by the factor in Step 2 9.045 x $21.49 = $194.38 Step 2. Look up the rate (10.5%) and the number of months (60). At the intersection is the table factor showing the monthly payment per $1,000 ($21.49) Step 1. Divide the loan amount by $1,000 $9,045 = 9.045 $1,000 1411 Table 14.3 Rebate Fraction Table based on Rule of 78 Months to go 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1412 Sum of digits 10 15 21 28 36 45 55 66 78 91 105 120 136 153 171 190 210 231 253 276 300 325 351 378 406 435 465 Months to go 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Sum of digits 496 528 561 595 630 666 703 741 780 820 861 903 946 990 1035 1081 1128 1176 1225 1275 1326 1378 1431 1485 1540 1596 1653 1711 1770 1830 60 Months Calculating Rebate and Payoff for Rule of 78 Rule of 78 A variation of the U. S. Rule. The Rule of 78 is not allowed for loans of 61 months or longer Step 6. Calculate the payoff Step 5. Calculate the rebate amount of the finance charge Step 4. Set up the rebate fraction from Table 14.3 Step 3. Find the number of payments remaining Step 2. Calculate the total finance charge Step 1. Find the balance of the loan outstanding 1413 Paying Off Installment Loan before Due Date What is the rebate of the finance charge and payoff if the pickup truck loan were paid off after 27 months (instead of 60)? 1. 60 x$ 194.38 = $11,662.80 27 x $194.38 = $ 5,248.26 Bal. Out.= $ 6,414.54 4. 561 Sum of digits 33 mnths 1,830 Sum of digits 60 mnths 2. $11,662.80 $ 9,045.00 $ 2,617.80 = Total fin. chr 5. 561 x $2,617.80 = $802.51 1,830 3. 60 27 = 33 Pymts. remaining 1414 6. $6414.54 $802.51 = $5,612.03 Revolving Charge Credit Cards t Fair Credi e and Charg Card Disclosure Act of 1988 Revolving charge account allows the buyer open end credit up to the maximum credit limit 1415 Interest charges are based on the interest rate times the previous month’s balance (outstanding balance) Payments are first applied towards interest and then the outstanding balance (US Rule) Paying Just the Minimum, and Get Nowhere Fast The cost – in years and dollarsof paying the minimum 2% of balances on credit cards charging 17% annual interest Balance Total Cost Total Time $1,000 $2,590.35 17 years, 3 months $2,500 $7,733.49 30 years, 3 months $5,000 $16,305.34 40 years, 2 months Source: www.bankrate.com 1416 Table 14.4 Schedule of Payments Monthly Outstanding payment balance number due Amount of 1 1/2% interest monthly Reduction in payment payment balance due Outstanding balance due 1 $120.00 $7,620.00 2 3 1417 $8,000.00 $7,620.00 (.015 x $8,000) $114.30 (.015 x $7,620) $7,234.30 $108.51 (.015 x $7,234.30) $500 $500 $500 $380.00 ($500 $120) ($8,000 380) $385.70 $7,234.30 ($500 $114.30) ($7,620 385.70) $391.49 $6,842.81 ($500 $108.51) ($7,234.30391.49) Calculating Average Daily Balance Step 5. Finance charge = Rate per month x Average daily balance Step 4. Divide the sum of the cumulative daily balances by the number of days in the billing cycle Step 3. Add the cumulative balances Step 2. When the daily balance is the same for more than one day, multiply it by the number of days the daily balance remained the same or the number of days of the current balances Step 1. Calculate the daily balance or amount owed at the end of each day during the billing cycle Daily = Previous + Cash + Purchases Payments balance balance advances 1418 Calculating Average Daily Balance Calculate the average daily balance and finance charge from the information that follows 30 day billing cycle 8/20 Billing date Previous balance $210 8/27 Payment $ 50cr 8/31 Charge Staples 30 9/5 Payment 10cr 9/10 Cash advance 60 Rate 2% per month on average daily balance 1419 Calculating Average Daily Balance Step 1 (7+4+5+5) 3121 Days Current daily bal Extension Step 2 $210 $1,470 160 ($210 $50) 640 190 ($160+$30) 950 180 ($190 $10) 900 10 240 ($180 + $60) 2,400 Step 3 31 $6,360 Step 4 Average daily balance = $6,360 = $205.16 31 Finance charge = $4.10 (205.16 x .02) 1420 Step 5 ... Step 1. Divide the loan amount by $1,000 $9,045 = 9.045 $1,000 14 11 Table 14. 3 Rebate Fraction Table based on Rule of 78 Months to go 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 14 12 Sum of digits 10 15 21... Calculate the rebate and payoff for Rule of 78 14 3 #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives LU14.3 Revolving Charge Credit Cards Calculate the finance charges on ... $9,045 Between 10.25% 10.50% 14 8 Table 14. 1 Annual Percentage Rate Table per $100 Annual percentage rate table per $100 (Partial) # of Payments 10.00% 14 9 10.25% 10.50% 10.75% 11.00%