2nd Quarter Project Credit

What is Credit? Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future.

Example of Credit Credit Cards You purchase a good or service and receive that good or service immediately, while promising to pay for it at some time in the future. You swipe your credit card and the total amount you owe is calculated for you. Each month you receive a statement with the balance of what you owe as well as a minimum monthly payment that is due

Other Examples of Credit 1 2 3 Student Loans Mortgages Auto-Loans

Pros & Cons of Credit Pros Receive a good or service immediately, even if you cannot pay for it at the time of purchase. Convenience – You don’t have to carry around cash.

Pros & Cons of Credit Cons Cost associated with purchasing a good or service on credit; INTEREST – fee charged by the lender to the borrower for the use of borrowed money. Misuse of credit which can lead to large amounts of debt.

Weighing the Pros & Cons Is it worth paying extra money (interest) in order to get ___________________ right now? We don’t know until we know how much money it is going to cost us. We must calculate the interest.

Simple Interest Formula I = PRT I = Interest (total amount you pay in order to borrow the money) P = Principal (total price you are borrowing) R = Rate (interest rate lender is charging; usually given as a percentage and must be converted to decimal) T = Time (term of the loan in years)

Examples I = PRT I = (1,200) (0.08) (2) I = $192 Ex 1: Purchase a car for $1,200 at an 8% interest rate for 2 years. How much interest do you pay over the two year period? I = PRT I = (1,200) (0.08) (2) I = $192

Examples I = PRT I = (5,500) (0.0578) (3) I = $953.70 Ex 2: Samantha purchases a car for $5,500 at an interest rate of 5.78% for 36 months. How much interest will Samantha pay? I = PRT I = (5,500) (0.0578) (3) I = $953.70

Examples I = PRT I = (45,000-5,000) (0.045) (6) I = $10,800 Ex 3: Tom purchases a brand new sports car for $45,000. After paying $5,000 down, Tom finances the rest at an interest rate of 4.5% for 72 months. How much interest does Tom pay over the life of the loan? I = PRT I = (45,000-5,000) (0.045) (6) I = $10,800

Why is this important to know? Discussion Why is this important to know? How can we use this information?

Calculating Monthly Payment 1) Find the Interest (I = PRT) 2) PMT = (P+I)/number of months

Step 2. PMT = (P+I) / # of months Examples Ex 1: Purchase a car for $1,200 at an 8% interest rate for 2 years. What is the monthly payment? Step 1. I = PRT I = (1,200) (0.08) (2) I = $192 Step 2. PMT = (P+I) / # of months (1200 + 192) / 24 Monthly Payment = $58

Step 2. PMT (P+I) / # of months Examples Ex 2: Samantha purchases a car for $5,500 at an interest rate of 5.78% for 36 months. What are Samantha’s monthly payments? Step 1. I = PRT I = (5,500) (0.0578) (3) I = $953.70 Step 2. PMT (P+I) / # of months (5500 + 953.70) / 36 PMT = $179.27

Step 2. PMT = (P+I)/#of months Examples Ex 3: Tom purchases a brand new sports car for $45,000. After paying $5,000 down, Tom finances the rest at an interest rate of 4.5% for 72 months. What are Tom’s monthly payments? Step 1. I = PRT I = (45,000-5,000) (0.045) (6) I = $10,800 Step 2. PMT = (P+I)/#of months (40000+10,800)/72 PMT = $705.56

What are some ways we could lower the monthly payment? Discussion Can you afford these cars? What are some ways we could lower the monthly payment? 1) Put down larger down payment 2) Decrease purchase price * negotiate price * purchase different vehicle 3) Increase term of the loan

Step 2. PMT = (P+I) / # of months Examples Ex 1: Purchase a car for $1,200 at an 8% interest rate for 2 / 4 years. What is the monthly payment? Step 1. I = PRT I = (1,200) (0.08) (2); I = (1,200) ( 0.08) (4) I = $192; I = $384 Step 2. PMT = (P+I) / # of months (1200 + 192) / 24; (1200 + 384) / 48 PMT = $58; PMT = $33

Step 2. PMT (P+I) / # of months Examples Ex 2: Samantha purchases a car for $5,500 at an interest rate of 5.78% for 72 months. What are Samantha’s monthly payments? Step 1. I = PRT I = (5,500) (0.0578) (6) I = $1907.40 / $953.70 Step 2. PMT (P+I) / # of months (5500 + 1907.40) / 72 PMT = $102.88 / $179.27

What is the net effect of lengthening the term of the loan: Discussion What is the net effect of lengthening the term of the loan: Lower monthly payments Higher amount of interest IS IT WORTH IT???

Discussion What would happen to the amount of interest as well as to the payment if we increased the Principal (purchased a more expensive car)? They both would increase What would happen to the interest and payment if we decreased the interest rate? They would both decrease

Project According to several sources listing the average and median salaries for college grads, the majority of students might expect to start out making between $35,000 and $40,000 each year. According to financial planners (CNN Article), consumers should not spend more than 8% of their gross monthly income on a car.

Your monthly car pmt should be less than $233.33 Project What does this mean and how does it affect you? If you make $35,000 annually right out of college, what is the maximum amount you should allow for a monthly car payment? 35,000 * 0.08 = 2800 2800 / 12 = 233.33 Your monthly car pmt should be less than $233.33

Project Find a car you would like to purchase. Research the financing options available for that particular vehicle. You must research at least 3 different sources and choose the best option. Calculate the monthly interest and monthly payment and make sure you can afford it (ie less than $200)