COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. Thomson Learning TM is a trademark used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems–without the written permission of the publisher. For permission to use material from this text or product, contact us by Tel (800) Fax (800) Contemporary Mathematics for Business and Consumers Third Edition By: Robert A. Brechner

Chapter 13 Consumer and Business Credit Copyright © 2003 by South-Western

Chapter 13, Consumer and Business Credit Section I Open – End Credit – Change Accounts, Credit Cards, and Lines of Credit 13-1 Calculating finance charge and new balance by the unpaid or previous month’s balance method Calculating finance charge and new balance using the average daily balance method Calculating the finance charge and new balance of business and personal lines of credit.

Chapter 13, Consumer and Business Credit (Cont.) Section II Closed – End Credit Installment Loans 13-4 Calculating the total deferred payment price and the amount of the finance charge of an installment loan Calculating the amount of the regular monthly payments of an installment loan by formula Calculating the annual percentage rate of an installment loan by APR tables and by formula.

Chapter 13, Consumer and Business Credit (Cont.) Section II Closed – End Credit Installment Loans 13-7 Calculating the finance charge and monthly installment loan by using the APR tables installment loan Calculating the finance charge rebate and the amount of the payoff when a loan is paid off early by using the sum – of – years – digits method.

Section I, Open – End Credit – Charge Accounts, Credit Cards, and Lines of Credit Revolving Credit Interest = Principal x Rate x Time

13-1 Calculating Finance Charge and ?New Balance by the Unpaid or Previous Month’s Balance Method Steps to Calculate the Finance Charge and new Balance by Using the Unpaid balance Method: Step 1. Divide the annual percentage rate by 12 to find the monthly or periodic interest rate. (Round to the nearest hundredth percent when necessary. Step 2. Calculate the finance charge by multiplying the previous month’s balance by the periodic interest rate from Step 1. Periodic rate = Annual percentage rate 12 Finance charge = Previous month’s balance x Periodic rate

13-1 Calculating Finance Charge and New Balance by the Unpaid or Previous Month’s Balance Method (Cont.) Steps to Calculate the Finance Charge and new Balance by Using the Unpaid balance Method: Step 3. Total all the purchases and cash advances for the month. Step 4. Total all the payments and credits for the month. Step 5. Use the following formula to determine the new balance: New Balance = Previous balance + Finance Charge + Purchases and Cash advances - Payments

13-2 Calculating Finance Charge and New Balance by Using the Average Daily Balance Method Steps to Calculate the Finance Charge and New Balance by Using the Average Daily Balance Method: Step 1. Starting with the previous month’s balance s the first unpaid balance, multiply each by the number of days that the balance existed, until the next account transaction. Step 2. At the end of the billing cycle, find the sum of all the daily balance figures. Step 3. Find the average daily balance using the formula Average daily balance = Sum of daily balance Days in billing cycle

13-2 Calculating Finance Charge and New Balance by Using the Average Daily Balance Method (Cont.) Steps to Calculate the Finance Charge and New Balance by Using the Average Daily Balance Method: Step 4. Calculate the finance charge by Step 5. Compute the new balance as before, using New balance = Previous balance + finance charge + Purchases and cash advances - Payments Finance Charge = Average daily balance x Periodic rate

Everybody’s Business “New Balance” can be calculated by adding the finance charge to the last “Unpaid Balance” of the month. $ $3.89 = $431.37

Section II, Closed – End Credit – Installment Loans 13-4 Calculating the Total Deferred Payment Price and the Amount of the Finance Charge of an Installment Loan Amount Financed = Purchase price – Down payment Down payment = Purchase price x Down payment percent Total amount of installment payments = Amount financed + finance charges

Section II, Closed – End Credit – Installment Loans (Cont.) 13-4 Calculating the Total Deferred Payment Price and the Amount of the Finance Charge of an Installment Loan Finance charge = Total amount of installment payments – Amount financed Total amount of Installment payment = Monthly payment amount x Number of Monthly payment Total deferred payment price = Total of installment payments + Down payment

13-5 Calculating the Amount of Regular Monthly Payments of an Installment Loan by adding the Add-on Interest Method Steps to Calculate the Monthly Payment Using the Add-On Interest: Step 1. Calculate the amount to be financed by subtracting the down payment from the purchase price. Step 2. Compute the add-on interest charge by using I = PRT. Amount financed = Purchase price (100%) – Down payment percent)

13-5 Calculating the Amount of Regular Monthly Payments of an Installment Loan by adding the Add-on Interest Method (Cont.) Steps to Calculate the Monthly Payment Using the Add-On Interest: Step 3. Find the Total of installment payments by adding the finance charge to the amount financed. Step 4. Find the regular payments by dividing the total of installment payments by the number of months of the loan. Total of installments payments = Amount financed + finance charges Regular monthly payments = Total of installment payments Number of months of the loan

Everybody’s Business As with open-end credit, installment loan consumers are protected by Regulation Z of the Truth in Leading Act. Advertisers of installment loans such as car dealers and furniture stores, must disclose in the ad and the loan agreement the following information: Down paymentAnnual percentage rate Terms and paymentsTotal payback

13-6 Calculating the Annual Percentage Rate of an Installment Loan by APR Tables and by Formula Steps to Find the Annual Percentage Rate of an Installment Loan Using APR Tables Step 1. Calculate the finance charge per $100 by Step 2. From the Table 13-1, scan down the Number of Payments column to the number of payments for the loan in question. Step 3. Scan to the right in that Number of Payments row to the table that most closely corresponds to the finance charge per $100 calculated in Step 1. Step 4. Look to the top of the column containing the finance charge per $100 to find the APR of the loan. Finance charge per $100 = Finance charge x 100 Amount financed

13-7 Calculating the Finance Charge and Monthly Payment of an Installment Loan by Using the APR Tables Steps to Find the Finance Charge and Monthly Payment of an Installment Loan by Using the APR Tables Step 1. Using the APR and the number of payments of the loan, locate the table factor at the intersection of the APR column and the number of payments row. This factor represents the finance charge per $100 financed. Step 2. The total finance charge of the loan can be found by Step 3. The monthly payment can now be found by Finance charge = Amount financed x Table factor 100 Monthly payment = Amount financed + finance charge Number of Months of the Loan

Chapter 13, Consumer and Business Credit Open – end creditFinance charge Annual percentage rate (APRUnsecured loan Secured loanRevolving credit Billing cycleAverage daily balance Line if creditPrime rate Install loanMortgage Down paymentCash or purchase price Amount financedAdd-on interest Finance charge rebateRule of 78 Rebate fraction

Annual percentage rate 12 Finance charge = Previous month’s balance x Periodic rate Sum of daily balances Days in billing cycle Finance charge = Average daily balance x Periodic rate New Previous Finance Purchases and Payments balance balance charge cash advances & credits =++= Copyright © 2003 by South-Western Periodic rate = Average daily balance = Chapter 13

Copyright © 2003 by South-Western Chapter 13 Amount financed = Purchase price - Down payment Down payment = Purchase price x Down payment percent Amount = Purchase price(100% - Down payment %) financed Total amount of = Amount financed + Finance charge installment payments Finance charge = Total amount of - Amount financed installment payments

Copyright © 2003 by South-Western Chapter 13 Total amount of = Monthly payment x Number of installment payments amount monthly payments Total deferred pmt. Price = Total of install pmts. + Downpmt. Interest = Principal x Rate x Time (finance charge) (amount financed) Regular monthly payments = Total of installment payments Number of months of loan

Copyright © 2003 by South-Western Chapter 13 Amount financed x APR table factor 100 n(n + 1) 2 Sum of digits of remaining payments Sum of digits of total payments Finance charge rebate = Rebate fraction x Total finance charge Loan payoff = (Payments remaining x Pmt amount) - Finance charge rebate Finance charge = Sum of digits = Rebate fraction =