Truth in Lending Ch 14.3

Truth in Lending Act  This law was to help consumers protect their credit  It did 2 main things:  Made all banks use APR so consumers would be able to compare interests rates and know how much they were being charged each year  Let borrowers pay off closed-end loans early and not pay as much in interest

Find the monthly payment Purchase PriceDown PaymentFinance Charge# of Monthly Payments $5000$750$99036 $675$0$5518

APR – Annual Percentage Rate  This tells you how much you are charged for interest in a year.  The problem became when different banks described interest in different ways  How would you know which is better: 1.5% per month or 9% per year?  APR has to be disclosed by any institution so you can compare with other places

Finding APR  The formula is too complicated, so there is a table that we will use on page 883 in your book  APR = true annual interest  n = total number of monthly payments  h = finance charge per $100 of amount financed

Find the true annual interest rate Amount FinancedFinance Charge# of Monthly Payments $1350$11018 $2800$39530

Find the APR Purchase PriceDown PaymentAdd-On Interest Rate # of Monthly Payments $5230$3256.5%30 $2000$06%18

Homework P. 887 # APR 8%8.5%9%9.5%10%10.5%11%11.5%12%12.5%13%13.5% n h – finance charge per $

Unearned Interest  When you pay a loan off early, you don’t pay all the interest – this is the unearned interest  Most lenders use the actuarial method  You do not get all of the unearned interest back because lenders charge an early payment penalty  This must be disclosed at the time of signing for the loan

Unearned Interest – Actuarial Method  For a closed-end loan that is paid off early, let R = regular monthly payments k = remaining number of scheduled payments (after the current payment) h = finance charge per $100 corresponding to the APR and the k remaining payments Unearned interest, u = kR(h/(100+h))

Payoff Amount  After you figure out the unearned interest, you can find the payoff amount – assuming no penalty charge: Payoff Amount = (k + 1)R – u

a) Find the unearned interest b) Find the payoff amount Regular Monthly Payments APRRemaining # of Payments $2128.5%18 $130010%48

Find the APR You have purchased $7000 of merchandise. You have agreed to a loan for 2 ½ years at 6.75%. Find the finance charge and the APR of the loan.

Find the APR After a down payment on your new car, you still owe $7454. You repay the loan in 48 monthly payments of $185 each. Find the finance charge. What is the APR of the loan?

Which is the better deal? You have the option of one of two loans for $7,000. You can borrow it from your bank at 7% add-on interest for 4 years or you can make 48 monthly payments of $190.

Suppose you get a raise and want to pay off your car loan. It was a 4 year loan and you want to pay it off after 3 years. Your monthly payment is $185 with an APR of 9%. a) Find the unearned interest. b) Find the payoff amount.

You want to pay off a loan that is a 3 year loan with an APR of 8.5%. Your monthly payment is $212 and you want to pay it off 6 months early. a) Find the unearned interest. b) Find the payoff amount.

Homework  P887 #13 – 20, 27, 29