In this chapter students will be able to: 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.
INSTALLMENT BUYING Chapter Fourteen McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved Learning unit objectives LU 14-1: 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 LU 14-2: Revolving Charge Credit Cards Calculate the finance charges on revolving charge credit card accounts 142 Cost of Installment Buying Deferred payment price (DPP) – Amount financed (AF) – the amount actually borrowed AF = Cash price Down payment the total of all monthly payments plus the down payment DPP = Total of all + Down monthly payments payment Finance charge (FC) – Installment loan – the interest charge A loan paid off in a series of equal periodic payments Payments include interest and principal FC = Total of all -monthly payments Amount financed 143 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 Amount financed = Cash price Down payment $9,045 = $9,345 $300 Finance charge = Total of all monthly payments $2,617.80 Amount financed = $11,662.80 $9,045 ($194.38 x 60) Deferred payment Price = Total of all + Down monthly payments payments $11,962.80 = $11,662.80 + $300 144 Calculating APR by Table Step Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor Step Go to APR Table 14.1 At the left side of the table are listed the number of payments that will be made Step 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 145 Annual Percentage Rate (APR) Calculating APR rate by table Truth in ct A Lending be t s u m R AP to accurate st the neare 1/4 of 1% Finance charge x $100 = Table 14.1 Amount financed lookup number $2,617.80 x 100 = $28.94 $9,045 Between 10.25% 10.50% 146 Annual Percentage Rate Table per $100 (Table 14.1) Annual percentage rate table per $100 (partial) # of Payments 10.00% 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 34.99 147 Calculating the Monthly Payment by Formula The pickup truck advertisement below shows 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 = $194.38 60 148 Calculating the Monthly Payment by Table Step Divide the loan amount by $1,000 $9,045 = 9.045 $1,000 Step 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 Multiply the quotient in Step by the factor in Step 9.045 x $21.49 = $194.38 149 Loan Amortization Table (Table 14.2) (Monthly payment per $1,000 to pay principal and interest on installment loan) (Partial) Terms in months 12 18 24 30 36 42 48 54 60 7.50% 170.34 86.76 58.9 45 36.66 31.11 27.15 24.18 21.88 20.04 8.00% 170.58 86.99 59.15 45.23 36.89 31.34 27.38 24.42 22.12 20.28 8.50% 170.83 87.22 59.37 45.46 37.12 31.57 27.62 24.65 22.36 20.52 9.00% 171.2 87.46 59.6 45.69 37.35 31.8 27.85 24.77 22.59 20.76 10.00% 171.56 87.92 60.06 46.14 37.81 32.27 28.32 25.36 23.07 21.25 10.50% 171.81 88.15 60.29 46.38 38.04 32.5 28.55 25.6 23.32 21.49 11.00% 172.05 88.38 60.52 46.61 38.28 32.74 28.79 25.85 23.56 21.74 11.50% 172.3 88.62 60.75 46.84 38.51 32.98 29.03 26.09 23.81 21.99 12.00% 172.55 88.85 60.98 47.07 38.75 33.21 29.28 26.33 24.06 22.24 1410 Revolving Charge Credit Cards it d e r C r i a F and Charge Card e Disclosur Act of 1988 • • • 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) Revolving charge account -allows the buyer open-end credit up to the maximum credit limit 1411 Paying Just the Minimum, and Getting Nowhere Fast The cost – in years and dollars of 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, months $2,500 $7,733.49 30 years, months $5,000 $16,305.34 40 years, months Source: www.bankrate.com 1412 Schedule of Payments (Table 14.3) Monthly Outstanding Payment Balance 1/2% Interest Number Due Payment 1 Amount of Monthly Reduction in Outstanding Payment Balance Due Balance Due $8,000.00 $120.00 $500 $380.00 $7,620.00 (.015 x $8,000) ($500 - $120) ($8,000 - 380) $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) $7,234.30 $108.51 $500 $391.49 $6,842.81 (.015 x $7,234.30) ($500 - $108.51) ($7,234.30-391.49) 1413 Calculating Average Daily Balance Step Calculate the daily balance or amount owed at the end of each day during the billing cycle: Daily Previous Cash + + Purchases -= balance balance advances Payments Step 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 balance Step Add the cumulative balances Step Divide the sum of the cumulative daily balances by the number of days in the billing cycle Step Finance charge = Rate per month x Average daily balance 1414 Calculating Average Daily Balance Calculate the balance outstanding at the end of month (use U.S Rule) given the following: purchased $600 desk; pay back $40 per month; and charge of ½% interest on unpaid balance 31-day billing cycle 8/20Billing date Previous balance $210 8/27Payment $50cr 8/31Charge Staples 30 9/5 Payment 10cr 9/10Cash advance 60 Rate 2% per month on average daily balance Month Balance due $600 $575 Interest $15.00 (.025 X $600) $14.38 (.025 X $575) Monthly payment $40 Reduction Balance in balance outstanding $25.00 $575.00 ($40 - $15) $40 $25.62 $549.38 1415 Calculating Average Daily Balance Calculate the average daily balance and finance charge from the information that follows 31-day billing cycle 8/20Billing date Previous balance $210 8/27Payment $50cr 8/31Charge Staples 30 9/5 Payment 10cr 9/10Cash advance 60 Rate 2% per month on average daily balance 1416 Calculating Average Daily Balance (7+4+5+5) 31 - 21 Days Current Daily Balance 5 10 $210 160 ($210 $50) 190 ($160 + $30) 180 ($190 $10) 240 ($180 + $60) 31 Average daily balance = Extension $1,470 640 950 900 2,400 $6,360 $6,360 = $205.16 31 Finance charge = $4.10 (205.16 x 02) 1417 ... ($500 - $120) ($8,000 - 380) $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) $7,234.30 $108.51 $500 $391.49 $6,842.81 (.015 x $7,234.30) ($500 - $108.51)... formula and by table lookup LU 1 4-2 : Revolving Charge Credit Cards Calculate the finance charges on revolving charge credit card accounts 142 Cost of Installment Buying Deferred payment price (DPP)...Learning unit objectives LU 1 4-1 : Cost of Installment Buying Calculate the amount financed, finance charge, and deferred payment Calculate