Chapter 4 Loans and Credit Cards

4.1 Promissory Notes

Interest-Bearing Promissory Notes Promissory Note – Your written promise, or IOU, that you will repay the $ to the lender on a certain date. Interest – What you pay to use the lender’s $. Collateral – Lenders may require a borrower to deposit or pledge property as security for a loan.

Home equity – The difference between what the home could be sold for and what is owed on it. Principal – amount borrowed on a promissory note Date of the note – date note is signed Due date – Date on which $ must be repaid

P x R x T = I Principal Rate Time Interest 2500 x 0.11 x 0.5 (6/12) = P R T 137.50 + 2500 = 2637.50 B. 3500 x 0.12 x 1.5 (18/12) = 630 + 3500 = 4130

Exact Interest Method Note is calculated on number of days Exact Interest uses a 365 day year Ex: note for 90 days shown as 90/365

C. 5000 x 0.08 x 75/365 = 82.19 + 5000 = 5082.19 D. 3500 x 0.09 x 150/365 = 129.45 + 3500 = 3629.45

Ordinary Interest Method Banker’s Interest Method – Uses a 360 day year – 30 days per month E. 5900 x 0.12 x 180/360 = 354 + 5900 = 6254 F. 4000 x 0.09 x 120/360 = 120 + 4000 = 4120

Rate of Interest Rate of = Interest for 1 Year / Principal Interest If interest is given for part of the year have to find interest for full 1 year.

G. 320 x 3 = 960 / 8000 = 0.12 x 100 = 12% H. 450 x 4 =1800 / 12000 = 0.15 x 100 =15%

4.2 Discounted Promissory Note

Discounted Promissory Notes Short-term loans – 30, 60, 90 days Interest is collected in advance – Bank Discount Since interest is paid in advance it is a noninterest-bearing note.

Principal x Rate of Discount = Bank Discount Principal – Bank Discount = Proceeds (what you get) 9600 x 0.10 x 0.75(9/12) = 720 9600 – 720 =8880 B. 12800 x 0.13 x 0.25(3/12) = 416 12800 – 416 = 12384

True Rate of Interest Interest rate is based on full principal amount – but you don’t receive full principal benefits True Rate = Interest / Actual Amount Interest Borrowed

C. 25000 – 23250 = 1750 for 6 months need 1 year 1750 x 2 = 3500 / 23250 = 0.151 x 100 = 15.1% D. 2600 – 2496 = 104 x 3 = 312 312 / 2496 = 0.125 x 100 = 12.5%

4.3 Interest Tables Table can be used as a quick reference Table based on $100 for 365 day year Steps to find interest: Principal / $100 = Use time and interest rate in table to find multiplier x answer from #1

620 / 100 = 6.2 0.3288 x 6.2 = 2.04 B. 550 / 100 = 5.5 0.7288 x 5.5 = 4.01

C. 1320 / 100 = 13.2 0.5479 + 0.5479 = 1.0958 x 13.2 = 14.46 D. 740 / 100 =7.4 1.0192 + 1.0192 =2.0384 x 7.4 = 15.08 E. 350 / 100 = 3.5 0.6575 + 0.6575 = 1.315 x 3.5 = 4.60

Due Dates F. March 6 > April 6 > May 6 > June 6 1 m 1 m 1 m G. March 31 > April 30 > May 31 1 m 1 m

4.4 Installment Loans

Installment Price and Finance Charge Down Payment – Reduces the amount of the loan Installment Contract Installment price is higher than cash price because seller adds a finance charge

12 months x $9 = 108 + 25 = 133 6 months x $26.17 = 157.02 + 20 =177.02

Monthly Installment Payments Sometimes need to find the amount of the payment C.175 – 25 = 150/15 =$10 D. 1044 – 100 = 944/59 =16 months

4.7 Credit Card Costs Transactions include purchases, payments and fees Charges are credits Previous balance Late fee Credit Limit Over-the-limit fee Cash advance Finance charges APR New Balance Minimum Payment Due

3/25 316.15 B. 1.575% 235.13

Verify Transactions Compare receipts to statement Unauthorized purchases C. 491.23-12.99+12.49-56.29 434.44 D. 208.66-48.99-18.79+17.89 158.77

Cost of Credit Card Use Finance Charges and Fees are big factors 97.16 F. 25+29+3.15+16 73.15