Unit 4: Consumer Credit Part 3: Cost of Credit Dollars & Sense.

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Presentation transcript:

Unit 4: Consumer Credit Part 3: Cost of Credit Dollars & Sense

Responsibilities of Credit  Know the real cost of debt.  Don’t use credit to live beyond your means.  It is all about the details…read the fine print!  Pay as much as you can, as early as you can.

The Cost of Credit Section 2The Costs and Methods of Obtaining Credit When shopping for credit, you should know the finance charges and annual percentage rates (APR) of the credit sources you are considering. annual percentage rate (APRP cost of credit on a yearly basis, expressed as a percentage

Loan Payments  Each of your loan payments are divided in two parts Principal – Amount of the loan Interest – What the bank charges for loan you money. Expressed as APR

Interest = Principal * Rate * Time  Principal: amount of loan.  Rate: interest rate for loan.  Time: length of loan. 1 = 1 Year  Maturity Date: the date at which the loan is paid off or comes due. Rate Sheet

Simple Interest = Principal * Rate * Time  Example:  $500, 7% interest, 1 Year Interest = Interest = $35 Only if you make one payment, Borrow Money January 1 st and payback on December 31st 500 * 7%*1

What If You Made Payments Monthly Section 2The Costs and Methods of Obtaining Credit Annual Percentage Rate Table for Monthly Payments

Principal Vs. Interest  Scenario: Principal = $117, Interest Rate = 9% Payment = $ Due Date = August 1 Loan taken out on July 1  What amount of July’s payment is: Interest Principal

A. $ X.09 (9%) =$_______ Balance of Principal July 1 Int. for 1 year B. July’s Interest= $_________ / 12 = $_________ int. for 1 year C. Amt. Applied to Principal $ $ ___________ = $_____________ Monthly Payment int. for 1 month Amt. to principal. D. Balance Left $117, $____________ = $_____________ Bal. July 1 amt. to principal bal. August 1 117, , , ,752.75

What’s the Balance on September 1 st ? A. $ X.09 (9%) =$_______ Balance of Principal Aug 1 Int. for 1 year B. Aug’s Interest= $_________ / 12 = $_________ int. for 1 year C. Amt. Applied to Principal $ $ _______ = $_____________ Monthly Payment int. for 1 month Amt. to principal. D. Balance Left $ $____________ = $_____________ Bal. Aug 1 amt. to principal bal. Sept 1 117, , ,

There are easier ways  Financial Calculators available on the Internet  Programs have been developed to create payment schedules. Shows both Principal and Interest Payment SchedulePayment Schedule  A Simple MS Excel Spreadsheet

The Cost of Using Credit SCENARIO:  Interest Rate 17%  Minimum Payment 2.5% or $10.00 Balance Time to Pay Off Interest Charged Total Pay $1, years$979.00$1, $2, years$2,941.00$5, $5, years$6,210.00$11,210.00

The Cost of Using Credit SCENARIO:  Interest Rate 24%  Minimum Payment: 4% of current balance or $10 BalanceTime to Pay Off Interest Charged Total Pay $2, yrs & 9 mo$1,774.96$ , $6, yrs & 4 mo $5,775.08$11, $10, yrs & 5 mo $9,774.89$19,774.89

Your Task  Complete The Loan Activity Worksheet available on the class website. Use the excel spreadsheet and financial calculators on the internet to answer the questions.