INSTALLMENT BUYING Chapter Fourteen McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning unit objectives 1. Calculate the amount financed, finance charge, and deferred payment. 2. Calculate the estimated APR by table lookup . 3. Calculate the monthly payment by formula and by table lookup. LU 14-1: Cost of Installment Buying LU 14-2: Revolving Charge Credit Cards 1. Calculate the finance charges on revolving charge credit card accounts. 14-

Cost of Installment Buying Deferred payment price (DPP) – the total of all monthly payments plus the down payment. DPP = Total of all + Down monthly payments payment Amount financed (AF) – the amount actually borrowed. AF = Cash price -- Down payment Finance charge (FC) – the interest charge. FC = Total of all -- Amount monthly payments financed Installment loan – A loan paid off in a series of equal periodic payments. Payments include interest and principal.

Cost of Installment Buying Mary Wilson would like to buy a boat that cost $9,345. If she puts down $300 she can finance the balance for 60 months at 10.5% (monthly payment = $194.38). Calculate the amount financed, finance charge, and deferred payment price. Amount financed = Cash price -- Down payment $9,045 = $9,345 -- $300 Finance charge = Total of all -- Amount monthly payments financed $2,617.80 = $11,662.80 -- $9,045 ($194.38 x 60) Deferred payment Price = Total of all + Down monthly payments payments $11,962.80 = $11,662.80 + $300

Calculating APR by Table Step 1. Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor. Step 2. Go to APR Table 14.1. At the left side of the table are listed the number of payments that will be made. Step 3. When you find the number of payments you are looking for, move to the right and look for the two numbers closest to the table lookup number. This will indicate the APR.

Annual Percentage Rate (APR) Calculating APR rate by table Finance charge x $100 = Table 14.1 Amount financed lookup number Truth in Lending Act APR must be accurate to the nearest 1/4 of 1% $2,617.80 x 100 = $28.94 $9,045 Between 10.25% -- 10.50%

Annual Percentage Rate Table per $100 (Table 14.1)

Calculating the Monthly Payment by Formula The pickup truck advertisement below shows a $194.38 monthly payment. We can check this by formula and by table lookup. Finance charge + Amount financed Number of payments of loan $2,617.80 + $9,045 60 = $194.38

Calculating the Monthly Payment by Table Step 1. Divide the loan amount by $1,000. $9,045 = 9.045 $1,000 Step 2. Look up the rate (10.5%) and the number of months (60). At the intersection is the table factor showing the monthly payment per $1,000 ($21.49). Step 3. Multiply the quotient in Step 1 by the factor in Step 2. 9.045 x $21.49 = $194.38

Loan Amortization Table (Table 14 Loan Amortization Table (Table 14.2) (Monthly payment per $1,000 to pay principal and interest on installment loan) (Partial)

Revolving Charge Credit Cards Fair Credit and Charge Card Disclosure Act of 1988. Interest charges are based on the interest rate times the previous month’s balance (outstanding balance). Payments are first applied towards interest and then the outstanding balance (US Rule). Revolving charge account -- allows the buyer open-end credit up to the maximum credit limit.

Paying Just the Minimum, and Getting Nowhere Fast The cost – in years and dollars -- of paying the minimum 2% of balances on credit cards charging 17% annual interest: Balance Total Cost Total Time $1,000 $2,590.35 17 years, 3 months $2,500 $7,733.49 30 years, 3 months $5,000 $16,305.34 40 years, 2 months Source: www.bankrate.com

Schedule of Payments (Table 14.3) Monthly Outstanding Amount of Payment Balance 1 1/2% Interest Monthly Reduction in Outstanding Number Due Payment Payment Balance Due Balance Due 1 $8,000.00 $120.00 $500 $380.00 $7,620.00 (.015 x $8,000) ($500 - $120) ($8,000 - 380) 2 $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) 3 $7,234.30 $108.51 $500 $391.49 $6,842.81 (.015 x $7,234.30) ($500 - $108.51) ($7,234.30-391.49)

Calculating Average Daily Balance Step 1. Calculate the daily balance or amount owed at the end of each day during the billing cycle: Daily Previous Cash balance balance advances = + + Purchases -- Payments Step 2. When the daily balance is the same for more than one day, multiply it by the number of days the daily balance remained the same or the number of days of the current balance. Step 3. Add the cumulative balances. Step 4. Divide the sum of the cumulative daily balances by the number of days in the billing cycle. Step 5. Finance charge = Rate per month x Average daily balance

Calculating Average Daily Balance Calculate the balance outstanding at the end of month 2 (use U.S. Rule) given the following: purchased $600 desk; pay back $40 per month; and charge of 2 ½% interest on unpaid balance. 31-day billing cycle 8/20 Billing date Previous balance $210 8/27 Payment $50cr. 8/31 Charge Staples 30 9/5 Payment 10cr. 9/10 Cash advance 60 Rate 2% per month on average daily balance. Balance Monthly Reduction Balance Month due Interest payment in balance outstanding 1 $600 $15.00 $40 $25.00 $575.00 (.025 X $600) ($40 - $15) 2 $575 $14.38 $40 $25.62 $549.38 (.025 X $575)

Calculating Average Daily Balance 1. Calculate the average daily balance and finance charge from the information that follows. 31-day billing cycle 8/20 Billing date Previous balance $210 8/27 Payment $50cr. 8/31 Charge Staples 30 9/5 Payment 10cr. 9/10 Cash advance 60 Rate 2% per month on average daily balance.

Calculating Average Daily Balance (7+4+5+5) Days Current Daily Balance Extension 7 $210 $1,470 4 160 ($210 -- $50) 640 5 190 ($160 + $30) 950 5 180 ($190 -- $10) 900 10 240 ($180 + $60) 2,400 $6,360 Average daily balance = $6,360 = $205.16 31 Finance charge = $4.10 (205.16 x .02) 31 - 21