CHAPTER 31 THE COST OF CREDIT. INTEREST CALCULATIONS SIMPLE INTEREST Interest rate x principal x time factor 9% or.09 x $1,000 x 1 year = $90 12% or.12.

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Presentation transcript:

CHAPTER 31 THE COST OF CREDIT

INTEREST CALCULATIONS SIMPLE INTEREST Interest rate x principal x time factor 9% or.09 x $1,000 x 1 year = $90 12% or.12 x $100 x 1 mo./12 = $1 12/100 or.12 x 100 x 60 days/360 = $2

MATURITY DATES The date on which a loan must be repaid Examples One year: 3/28/06 to 3/28/07 Four months: 3/28/06 to 7/28/06 90 days: 3/28/06 3 days in March; 30 days in April; 31 days in May; 26 days in June 6/26/06

INSTALLMENT INTEREST Decreasing Loan Payment Mortgage/Equity Loans Level Loan Payment Car Loans/Student Loans

FINANCE CHARGES Annual Percentage Rate (APR)-- states the percentage cost of credit on a yearly basis APR includes interest, service fees Credit Insurance--special insurance that repays the balance of the amount owed, if the borrower dies or becomes disabled prior to settlement of amount owed

CREDIT ALTERNATIVES Shop for best APRs Remember using credit means spending your future income make sure benefits outweigh the costs of credit (to ensure a high quality of life)