Objectives 1. Correctly calculate interest for installment loans and purchases 2. Correctly calculate the interest rate (APR) when buying through installments with a down payment 3. Correctly calculate finance charges and amount due on credit cards 4. Explain several advantages and disadvantages to using credit cards 5. Locate several examples of local interest rates
Installment Loans (Part 1) Installment/Consumer Loans Repaid in small payments One payment = One installment Usually paid monthly Face Amount Amount of loan being borrowed (or the amount received) Finance Charge Amount owed in addition to face amount including costs and interest ($5,000 + interest + costs)
Formulas A. Interest per year = Amount Borrowed X Interest Rate B. Actual interest due = Interest Per Year X Number of Years C. Total amount to be repaid = Amount Borrowed + Actual Interest Due D. Amount of each monthly payment = Total Amount to Be Repaid ÷ Number of Payments
Example You want to borrow $1200 and repay it in 12 monthly installments. Your bank will lend you the money with interest at the yearly rate of 10%. A. Find the interest per year B. Find the actual interest due C. Find the total amount to be repaid D. Find the amount of each monthly payment
Solutions A. Interest Per Year $1200 x 10% (APR) = = $120 Interest per year B. $120.00 X 1 = $120.00 (12 months in a year) C. Total to be repaid $1200 + $120 = $1320 Total amount to be repaid D. Monthly payment $1320/12 = = $110 Payment per month
Example You want to borrow $2000 and repay it in 18 monthly installments. Your bank will lend you the money with interest at the yearly rate of 8%. A. Find the interest per year B. Find the actual interest due C. Find the total amount to be repaid D. Find the amount of each monthly payment
Solution A. Interest per year $2000 x 8% = $160 interest per year B. Actual interest rate $160 x 1.5 years = $240 actual interest C. Total repaid $2000 + $240 = $2240 D. Amount per month $2240/18 = $124.44 payment per month (round your answer!)
Exercise 2 Formulas A. Total amount to be repaid = Monthly Payment X Terms in Months B. Finance Charge = Total to Be Repaid - Loan Amount C. APR (Annual Percentage Rate) = Finance Charge ÷ Loan Amount ÷ Terms in Years * Written in % format
Class Examples Assignment Workbook part 1, Exercise 2
Installment Buying (Part 2) Installment Plan Examples? Borrowing the sellers money and paying it back in partial payments Usually weekly or monthly payments
Installment Buying (Part 2) Down Payment Amount paid before financing the balance Example $1499 TV - $300 down payment Finance Charge Amount owed in addition to the face amount Example $1600 TV + $150 finance charge The Face Amount is the amount being borrowed
More Examples in History Singer Sewing Machines 1850 first to offer payment plans Automobile Industry 1910 first vehicle financed by consumers Truth in Lending Act (1969) Full disclosure of purchase terms
Formulas A. Installment Price = Monthly Payment X # of Months + Down Payment B. Finance Charge = Installment Price – Cash Price
Formulas C. Amount Financed = Cash Price – Down Payment D. APR (Annual Percentage Rate) = Finance Charge ÷ Amount Financed ÷ Terms in Years
Example A TV set has a cash price of $800. The installment terms are $50 down and $50 a month for 18 months. A. Find the installment price of the TV B. Find the finance charge C. Find the amount financed D. Find the annual percentage rate (APR)
Solutions A. Installment Price $50/month x 18 months =$900 $900 + $50 down payment = $950 installment price B. Finance Charge $950 installment price - $800 cash price = $150 finance chg
Solutions C. Amount Financed $800 cash price - $50 down payment = $750 amt financed D. APR $150/$750 =.20/1.5 yrs =.133 or 13% APR
Review and Assignment Question: If you cannot afford the cash price for an item, how can an installment plan work to your advantage? An installment plan allows you to get the item immediately, and make payments on a weekly or monthly basis.
Credit Cards Advantages Allows large purchases Help in emergencies Develop good spending habits
Credit Cards Disadvantages Buy excessively without paying attention whether they can pay the debt accumulated May cost more than other forms of credit, like a personal loan Can damage credit rating
Credit Cards Did you know: 1. The credit card was introduced Sept 15, 1958. 2. Charge It was the first bank card introduced in 1946 by John Biggins 1. Closed loop process 2. No card, bill forwarded to bank
Credit Cards Did you know: 3. The Diners Club card was first widespread credit card 1. Dinner story, first use of plastic/wood card 2. Must pay off each month 4. American Express, 1958, first full function plastic credit card (purple color) 5. Super Bowl XX, in 1986, Discover Card was the first card to offer payments over time.
Types of Credit Cards Major Credit Cards VISA, MASTERCARD, DISCOVER, CITIBANK, AMERICAN EXPRESS Offer general rewards programs
Types of Credit Cards Retail Store Credit Cards Kohls, Macys, Boscovs, Bon-Ton Only allow you to earn points and redeem them for a particular brand of merchandise. These cards will appeal to those who shop very frequently at a particular retailer.
Blessing or a Curse? Pros Convenience Easier, quicker when making a purchase… not immediate bite out of your pocket People can borrow money easily and help fuel the purchase of consumer goods and services no matter what their income Rewards There are cards that offer plane tickets, sports merchandise, and good old-fashioned cash. Others build up a stockpile of points for cardholders to use to get whatever their hearts desire.
Blessing or a Curse? Pros Building Credit Using a credit cardand using it responsiblycan help build ones credit score, which could mean a better shot at a loan or a better mortgage down the road.
Blessing or a Curse? Cons Late Payments Once you fall behind by one payment, the climb back to a debt- free account becomes harder and harder. Late fees, interest, and penalties build. you may find yourself making monthly payments that only cover your charges and dont even touch your principal purchases.
Blessing or a Curse? Cons Debt Often as a result of late payments fees and charges and piling interest, the matter seems to continually get worse, not better. Hidden Fees Over-Spending Millions are living beyond their means
The Future Paypal Checkfree ~ Online Payments Pay by cell phone
The Future Safety, security, identity theft? Chips imbedded in our body (1958 started) Radio Frequency Identification
Concept Review 1. How old is the credit card? 2. Which company had the first wide spread credit card? 3. Explain one advantage and one disadvantage to our society using credit cards