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McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter 14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards

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14-2 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 Installment Buying, Rule of 78, and Revolving Charge Credit Cards #14 Learning Unit Objectives Cost of Installment Buying LU14.1

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14-3 Calculate the rebate and payoff for Rule of 78 Installment Buying, Rule of 78, and Revolving Charge Credit Cards #14 Learning Unit Objectives Paying Off Installment Loan before Due Date LU14.2

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14-4 Calculate the finance charges on revolving charge credit card accounts Installment Buying, Rule of 78, and Revolving Charge Credit Cards #14 Learning Unit Objectives Revolving Charge Credit Cards LU14.3

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14-5 Finance charge (FC) - the interest charge. FC = Total of all - Amount monthly payments financed Installment loan - a loan paid of 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

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14-6 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 - 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

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14-7 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 14.1. 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.

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14-8 Annual Percentage Rate (APR) 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% Truth in Lending Act APR must be accurate to the nearest 1/4 of 1%

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14-9 Table 14.1 - Annual Percentage Rate Table per $100

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14-10 Calculating the Monthly Payment by Formula Finance charge + Amount financed Number of payments of loan $2,617.80 + $9,045 60 $194.38

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14-11 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 2 9.045 x $21.49 = $194.38 Calculating the Monthly Payment by Table Step 1. Divide the loan amount by $1,000 $9,045 = 9.045 $1,000

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14-12 Table 14.2 - Loan Amortization Table (Monthly payment per $1,000 to pay principal and interest on installment loan) (Partial)

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14-13 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 1. Find the balance of the loan outstanding Step 2. Calculate the total finance charge Step 3. Find the number of payments remaining Step 4. Set up the rebate fraction from Table 14.3 Step 5. Calculate the rebate amount of the finance charge Step 6. Calculate the payoff

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14-14 Table 14.3 - Rebate Fraction Table based on Rule of 78 60 Months

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14-15 Paying Off Installment Loan before Due Date What is the rebate of the finance charge and payoff if the car loan were paid off after 27 months? 1. 60 x$ 194.38 = $11,662.80 - 27 x $194.38 = $ 5,248.26 Bal. Out.= $ 6,414.54 2. $11,662.80 - $ 9,045.00 $ 2,617.80 = Total fin. chr. 3. 60 - 27 = 33 Pymts. remaining 4. 561 - Sum of digits 33 mnths 1,830 - Sum of digits 60 mnths 5. 561 x $2,617.80 = $802.51 1,830 6. $6414.54 - $802.51 = $5,612.03

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14-16 Revolving charge account - allows the buyer open- end credit up to the maximum credit limit. Fair Credit and Charge Card Disclosure Act of 1988. Revolving Charge Credit Cards 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)

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14-17 Paying Just the Minimum, and Get Nowhere Fast BalanceTotal CostTotal Time $1,000$2,590.3517 years, 3 months $2,500$7,733.4930 years, 3 months $5,000$16,305.3440 years, 2 months The cost – in years and dollars-of paying the minimum 2% of balances on credit cards charging 17% annual interest Source: www.bankrate.com

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14-18 Table 14.4 - Schedule of Payments Monthly Outstanding Amount of payment balance1 1/2% interestmonthly Reduction inOutstanding number due paymentpayment balance duebalance due 1 $8,000.00 $120.00 $500 $380.00 $7,620.00 (.015 x $8,000) ($500 - $120) ($8,000 - 380) 2 $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) 3 $7,234.30 $108.51 $500 $391.49 $6,842.81 (.015 x $7,234.30)($500 - $108.51) ($7,234.30-391.49)

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14-19 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 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 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 Step 5. Finance charge = Rate per month x Average daily balance

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14-20 30 - day billing cycle 6/20Billing datePrevious balance$450 6/27Payment$ 50cr. 6/30Charge JCPenney 200 7/9Payment 40cr. 7/12Cash advance 60 Calculating Average Daily Balance

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14-21 DaysCurrent daily bal.Extension 7$450$3,150 3 400 ($450- $50) 1,200 9 600 ($400+$200) 5,400 3 560 ($600 - $40) 1,680 8 620 ($560 + $60) 4,960 30$16,390 Average daily balance = $16,390 = $546.33 30 Finance charge = $546.33 x.015 = $8.19 Step 1 Step 2 Step 3 Step 4 30-22 Calculating Average Daily Balance Step 5 (7+3+9+2)

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14-22 Problem 14-10: $35,300 - 3,530 down payment $31,770 loan amount $31,770 $1,000 = $31.77 x 20.28 = $664.2956 = $644.30 Solution:

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14-23 Problem 14-12: a. Amount financed: $7,880 - 0 =$7,880 Selling Down Amount price payment financed - = b. Finance charge: ($185.53 x 60) - $7,880 = $3,251.80 C. APR by table lookup: $3,251.80 X $100 = $41.27 $7,880.00 Between 14.50% and 14.75% d. Monthly payment by formula: $3,251.80 + $7,880.0 = $185.53 60 e. Monthly payment by table lookup (use 14.50%): $7,880 = 7.88 $23.53 = $185.42 $1,000 Solution:

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14-24 Problem 14-17: First America BankU.S. Bank $488.26 x 48 = $23,436.48 $497.70 x 48 = $23,889.60 - 20,000.00 - 20,000.00 $ 3,436.48 finance charge $ 3,889.60 finance charge $3,436.48 x $100 = $17.1824$3,889.60 x $100 = $19.448 $20,000 = Between 8.00% and 8.25%= Between 8.75% and 9% Solution:

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14-25 Problem 14-18: No. of days Current Of current balanceBalanceExtension 6$ 800$4,800 5 740 3,700 7 990 6,930 4 970 3,880 6 (28 – 22) 1,170 7,020 $26,330 ÷ 28 = $940.35714 Solution:

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14-26 Problem 14-19: Monthly1½ %Amount of Outstanding Payment Outstanding interest monthly Reduction in Balance due Number balance duepayment payment balance due 1 $500.00$7.50$100.00 $92.50$407.50 ($500 x.015) ($100.00 - $7.50) ($500 - $92.50) 2 $407.50$6.11$100.00 $93.89$313.61 ($407.50 x.015) ($100.00 - $6.11) ($407.50 - $93.89) 3 $313.61$4.70$100.00 $95.30$218.31 ($313.61 x.015) ($100.00 - $4.70) ($313.61 - $95.30) Solution:

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