Calculate the amount financed, finance charge, and deferred payment. 2. Calculate the estimated APR by table lookup. 3. Calculate the monthly payment by formula and by table lookup. LU 14-1: Cost of Installment Buying LEARNING UNIT OBJECTIVES LU 14-2: Revolving Charge Credit Cards 1. Calculate the finance charges on revolving charge credit card accounts.
14-3 Finance charge (FC) – the interest charge. FC = Total of all -- Amount monthly payments financed Installment loan – A loan paid off in a series of equal periodic payments. Payments include interest and principal. Amount financed (AF) – the amount actually borrowed. AF = Cash price -- Down payment Deferred payment price (DPP) – the total of all monthly payments plus the down payment. DPP = Total of all + Down monthly payments payment COST OF INSTALLMENT BUYING
14-4 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 Finance charge = Total of all -- Amount monthly payments financed Deferred payment Price = Total of all + Down monthly payments payments $9,045 = $9, $300 $2, = $11, $9,045 ($ x 60) $11, = $11, $300
14-5 CALCULATING APR BY TABLE Step 1. Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor. Step 2. Go to APR Table At the left side of the table are listed the number of payments that will be made. 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.
14-6 ANNUAL PERCENTAGE RATE (APR) Calculating APR rate by table Finance charge x $100 = Table 14.1 Amount financed lookup number $2, x 100 = $28.94 $9,045 Between 10.25% % Truth in Lending Act APR must be accurate to the nearest 1/4 of 1%
14-7 ANNUAL PERCENTAGE RATE TABLE PER $100 (TABLE 14.1)
14-8 CALCULATING THE MONTHLY PAYMENT BY FORMULA Finance charge + Amount financed Number of payments of loan The pickup truck advertisement below shows a $ monthly payment. We can check this by formula and by table lookup. $2, $9, = $194.38
14-9 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 3. Multiply the quotient in Step 1 by the factor in Step x $21.49 = $ CALCULATING THE MONTHLY PAYMENT BY TABLE Step 1. Divide the loan amount by $1,000. $9,045 = $1,000
14-10 LOAN AMORTIZATION TABLE (TABLE 14.2) (MONTHLY PAYMENT PER $1,000 TO PAY PRINCIPAL AND INTEREST ON INSTALLMENT LOAN) (PARTIAL)
14-11 Revolving charge account -- allows the buyer open-end credit up to the maximum credit limit. Fair Credit and Charge Card Disclosure Act of REVOLVING CHARGE CREDIT CARDS Interest charges are based on the interest rate times the previous months balance (outstanding balance). Payments are first applied towards interest and then the outstanding balance (US Rule).
14-12 PAYING JUST THE MINIMUM, AND GETTING NOWHERE FAST BalanceTotal CostTotal Time $1,000$2, years, 3 months $2,500$7, years, 3 months $5,000$16, years, 2 months The cost – in years and dollars -- of paying the minimum 2% of balances on credit cards charging 17% annual interest: Source:
14-13 SCHEDULE OF PAYMENTS (TABLE 14.3) Monthly Outstanding Amount of Payment Balance1 1/2% InterestMonthly Reduction inOutstanding Number Due PaymentPayment Balance DueBalance Due 1 $8, $ $500 $ $7, (.015 x $8,000) ($500 - $120) ($8, ) 2 $7, $ $500 $ $7, (.015 x $7,620)($500 - $114.30) ($7, ) 3 $7, $ $500 $ $6, (.015 x $7,234.30)($500 - $108.51) ($7, )
14-14 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 balance. Step 3. Add the cumulative balances. Step 4. Divide the sum of the cumulative daily balances by the number of days in the billing cycle. CALCULATING AVERAGE DAILY BALANCE Step 5. Finance charge = Rate per month x Average daily balance Step 1. Calculate the daily balance or amount owed at the end of each day during the billing cycle: Daily Previous Cash balance balance advances = ++ Purchases -- Payments
day billing cycle 8/20Billing datePrevious balance $210 8/27Payment $50cr. 8/31Charge Staples 30 9/5Payment 10cr. 9/10Cash advance 60 CALCULATING AVERAGE DAILY BALANCE Rate 2% per month on average daily balance. Balance Monthly Reduction Balance Month due Interest payment in balance outstanding 1 $600 $15.00 $40 $25.00 $ (.025 X $600) ($40 - $15) Calculate the balance outstanding at the end of month 2 (use U.S. Rule) given the following: purchased $600 desk; pay back $40 per month; and charge of 2 ½% interest on unpaid balance. 2 $575 $14.38 $40 $25.62$ (.025 X $575)
day billing cycle 8/20Billing datePrevious balance $210 8/27Payment $50cr. 8/31Charge Staples 30 9/5Payment 10cr. 9/10Cash advance 60 CALCULATING AVERAGE DAILY BALANCE Rate 2% per month on average daily balance. 1. Calculate the average daily balance and finance charge from the information that follows.