Chapter 14: Installment Purchases Definitions, examples, etc. taken from Contemporary Business Mathematics for Colleges, 14th Edition by Deitz & Southam, Thomson Southwestern Publisher.

Key Terms / Items (continued) To convert an annual interest rate to a monthly interest rate: annual rate ÷ 12 To convert a monthly interest rate to an annual interest rate: monthly interest rate x 12 Truth in Lending Act (TILA): consumers must be told the total of all finance charges (interest, carrying charges, insurance and special fees), the annual percentage rate (APR) and the method by which finance charges are computed.

Key Terms / Items (continued) Effective interest rate: the “true” interest rate (see example G, page 275). R = I ÷ (P x T), where I is the interest in dollars, T is the time of the loan in years, and P is the average unpaid balance (or the average principal) over the period of the loan. Average unpaid balance: the sum of all of the unpaid monthly balances divided by the number of months.

Key Terms / Items (continued) Amortization: typically, a loan where the total payments are equal each month AND the interest is calculated on the unpaid balance each month. Loan amount x amortization payment factor = monthly payment. Steps: 1. Divide the loan amount by $1,000. 2. Find the amortization payment factor in Table 14-1. 3. Multiply the quotient in step 1 by the amortization payment factor found in step 2. The product is the amount of the monthly payment.

Key Terms / Items (continued) Amortization Schedule – a schedule of loan payments. See Example L, page 280. Mortgage Fixed interest rate mortgages Variable interest rate mortgages 15, 20, 30 or 40 year loans