1. Unit 4: Consumer Credit Part 3: Cost of Credit Dollars & Sense

2. Responsibilities of Credit  Know the real cost of debt.  Don’t use credit to live beyond your means.  It is all about the details…read the fine print!  Pay as much as you can, as early as you can.

3. The Cost of Credit Section 2The Costs and Methods of Obtaining Credit When shopping for credit, you should know the finance charges and annual percentage rates (APR) of the credit sources you are considering. annual percentage rate (APRP cost of credit on a yearly basis, expressed as a percentage

4. Loan Payments  Each of your loan payments are divided in two parts Principal – Amount of the loan Interest – What the bank charges for loan you money. Expressed as APR

5. Interest = Principal * Rate * Time  Principal: amount of loan.  Rate: interest rate for loan.  Time: length of loan. 1 = 1 Year  Maturity Date: the date at which the loan is paid off or comes due. Rate Sheet

6. Simple Interest = Principal * Rate * Time  Example:  $500, 7% interest, 1 Year Interest = Interest = $35 Only if you make one payment, Borrow Money January 1 st and payback on December 31st 500 * 7%*1

7. What If You Made Payments Monthly Section 2The Costs and Methods of Obtaining Credit Annual Percentage Rate Table for Monthly Payments

8. Principal Vs. Interest  Scenario: Principal = $117,947.81 Interest Rate = 9% Payment = $1079.67 Due Date = August 1 Loan taken out on July 1  What amount of July’s payment is: Interest Principal

9. A. $ X.09 (9%) =$_______ Balance of Principal July 1 Int. for 1 year B. July’s Interest= $_________ / 12 = $_________ int. for 1 year C. Amt. Applied to Principal $ 1079.67 - $ ___________ = $_____________ Monthly Payment int. for 1 month Amt. to principal. D. Balance Left $117,947.81 - $____________ = $_____________ Bal. July 1 amt. to principal bal. August 1 117,947.81 10,615.30 884.6110,615.30 884.61 195.06 117,752.75

10. What’s the Balance on September 1 st ? A. $ X.09 (9%) =$_______ Balance of Principal Aug 1 Int. for 1 year B. Aug’s Interest= $_________ / 12 = $_________ int. for 1 year C. Amt. Applied to Principal $ 1079.67 - $ _______ = $_____________ Monthly Payment int. for 1 month Amt. to principal. D. Balance Left $117752.75 - $____________ = $_____________ Bal. Aug 1 amt. to principal bal. Sept 1 117,752.75 10,597.75 883.1510,597.75 883.15 196.52 117556.23

11. There are easier ways  Financial Calculators available on the Internet  Programs have been developed to create payment schedules. Shows both Principal and Interest Payment SchedulePayment Schedule  A Simple MS Excel Spreadsheet

12. The Cost of Using Credit SCENARIO:  Interest Rate 17%  Minimum Payment 2.5% or $10.00 Balance Time to Pay Off Interest Charged Total Pay $1,000.0012 years$979.00$1,979.00 $2,500.0019 years$2,941.00$5,441.00 $5,000.0024+ years$6,210.00$11,210.00

13. The Cost of Using Credit SCENARIO:  Interest Rate 24%  Minimum Payment: 4% of current balance or $10 BalanceTime to Pay Off Interest Charged Total Pay $2,000.009 yrs & 9 mo$1,774.96$3774.96, $6,000.0014 yrs & 4 mo $5,775.08$11,775.08 $10,000.0016 yrs & 5 mo $9,774.89$19,774.89

14. Your Task  Complete The Loan Activity Worksheet available on the class website. Use the excel spreadsheet and financial calculators on the internet to answer the questions.