2. Installment Buying, Rule of 78, and Revolving Charge Credit Cards
Chapter 14
Installment Buying, Rule of 78, and Revolving Charge Credit Cards
McGraw-Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Installment Buying, Rule of 78, and Revolving Charge Credit Cards
#14
Installment Buying, Rule of 78, and Revolving Charge Credit Cards
Learning Unit Objectives
LU14.1
Cost of Installment Buying
Calculate the amount financed, finance charge, and deferred payment
Calculate the estimated APR by table lookup
Calculate the monthly payment by formula and by table lookup

4. Installment Buying, Rule of 78, and Revolving Charge Credit Cards
#14
Installment Buying, Rule of 78, and Revolving Charge Credit Cards
Learning Unit Objectives
LU14.2
Paying Off Installment Loan before Due Date
Calculate the rebate and payoff for Rule of 78

5. Installment Buying, Rule of 78, and Revolving Charge Credit Cards
#14
Installment Buying, Rule of 78, and Revolving Charge Credit Cards
Learning Unit Objectives
LU14.3
Revolving Charge Credit Cards
Calculate the finance charges on revolving charge credit card accounts

6. 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 of in a series of equal periodic payments. Payments include interest and principal.

7. Cost of Installment Buying
Mary Wilson would like to buy a boat that cost $10,000. If she puts down $1,000 she can finance the balance for 48 months at 11% (monthly payment = $232.65). Calculate the amount financed, finance charge, and deferred payment price.
Amount financed = Cash price - Down payment
$9,000 = $10,000 - $1,000
Finance Charge = Total of all Amount
monthly payments financed
$2, = $11, $9,000
($ x 48)
Deferred payment = Total of all Down
Price monthly payment
payments
$12, = $11, $1,000

8. Annual Percentage Rate (APR)
Calculating APR rate by table
Finance charge x $100 = Table 14.1
Amount financed lookup #
Truth in
Lending Act
APR must be
accurate to
the nearest
1/4 of 1%
$2, x 100 = $24.08
$9,000
Between 11.00% %

9. Table 14.1 - Annual Percentage Rate Table per $100

10. Calculating the Monthly Payment by Formula
Finance charge + Amount financed
Number of payments of loan
$2, $9,000 48
$232.65

11. Calculating the Monthly Payment by Table
Step 3. Multiply the quotient in Step 1 by the factor in Step 2
9 x $25.85 = $232.65
Step 2. Look up the rate (11%) and the number of months (48). At the intersection is the table factor showing the monthly payment per $1,000 ($25.85)
Step 1. Divide the loan amount by $1,000
$9,000 = 9
$1,000

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

13. Calculating Rebate and Payoff for Rule of 78
Rule of 78 - A variation of the U. S. Rule. The Rule of 78 is not allowed for loans of 61 months or longer
Step 6. Calculate the payoff
Step 5. Calculate the rebate amount of the finance charge
Step 4. Set up the rebate fraction from Table 14.3
Step 3. Find the number of payments remaining
Step 2. Calculate the total finance charge
Step 1. Find the balance of the loan outstanding

14. Table 14.3 - Rebate Fraction Table based on Rule of 78

15. Paying Off Installment Loan before Due Date
What is the rebate of the finance charge and payoff if the boat loan were paid off after 30 months?
x$ = $11,167.20
- 30 x $ = $ 6,979.50
Bal. Out.= $ 4,187.70
Sum of digits 18 mnths
1,176 - Sum of digits 48 mnths
x $2, = $315.13
1,176
2. $11,167.20
- $ 9,000.00
$ 2, = Total fin. chr.
6. $4, $ = $3,872.57
= 18 - Pymts. remaining

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

17. Table 14.4 - Schedule of Payments
Monthly Outstanding Amount of
payment balance 1 1/2% interest monthly Reduction in Outstanding
number due payment payment balance due balance due
1 $8, $ $ $ $7,620.00
(.015 x $8,000) ($500 - $120) ($8, )
2 $7, $ $ $ $7,234.30
(.015 x $7,620) ($500 - $114.30) ($7, )
3 $7, $ $ $ $6,842.81
(.015 x $7,234.30) ($500 - $108.51) ($7, )

18. Calculating Average Daily Balance
Step 4. Divide the sum of the cumulative daily balances by the number of days in the billing cycle.
Step 3. Add the cumulative balances.
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 balances.
Step 1. Calculate the daily balance or amount owed at the end of each day during the billing cycle
Daily = Previous + Cash Purchases - Payments
balance balance advances

19. Calculating Average Daily Balance
30 - day billing cycle
6/20 Billing date Previous balance $450
6/27 Payment $ 50cr.
6/30 Charge JCPenney
7/9 Payment cr.
7/12 Cash advance

20. Calculating Average Daily Balance
Days Current daily bal. Extension
7 $450 $3,150
($450- $50) 1,200
($400+$200) 5,400
($600 - $40) 1,680
($560 + $60) 4,960
30 $16,390
Average daily balance = $16,390 = $546.33 30
Step 1
Step 2
Step 3
30-22
Step 4