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

2. 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-

3. 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.

4. 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, = $9, $300
Finance charge = Total of all Amount
monthly payments financed
$2, = $11, $9,045
($ x 60)
Deferred payment Price = Total of all Down
monthly payments payments
$11, = $11, $300

5. 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 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.

6. 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, x 100 = $28.94
$9,045
Between 10.25% %

7. Annual Percentage Rate Table per $100 (Table 14.1)

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

9. 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

10. 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)

11. 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.

12. 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:

13. 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, $ $ $ $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, )

14. 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

15. 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
9/5 Payment cr.
9/10 Cash advance
Rate 2% per month on average daily balance.
Balance Monthly Reduction Balance
Month due Interest payment in balance outstanding
1 $600 $ $40 $ $575.00
(.025 X $600) ($40 - $15)
2 $575 $ $40 $25.62 $549.38
(.025 X $575)

16. 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
9/5 Payment cr.
9/10 Cash advance
Rate 2% per month on average daily balance.

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