1. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved The Cost of Credit Installment Buying

2. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Installment Credit Installment credit is also used for specific purchases but allows the borrower more time to repay the money Principal is the total amount of money outstanding on the loan Installment loans typically require the borrower to make monthly payments Part of each payment goes to reduce the principal Monthly payments also include interest charges © 2010 Pearson Education, Inc. All rights reserved 0-2

3. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Installments A fixed installment loan is one on which you pay a fixed amount of money for a set number of payments. Examples: college tuition loans, loans for cars, boats, appliances, furniture, etc. They are usually repaid in 24, 36, 48 or 60 months.

4. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Installments An open-ended installment loan is a loan on which you can make variable payments each month. Example: credit cards

5. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Cost of Installment Credit Installment loans may span a few years These type of loans are generally used for purchases such as furniture, boats, and other large items Note that using installment credit does make the purchase of these items more costly Take a look at Figure 9.1 to see how much interest you might pay over the life of a typical loan © 2010 Pearson Education, Inc. All rights reserved 0-8

6. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Figure 9.1 © 2010 Pearson Education, Inc. All rights reserved 0-6

7. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Installment Loans and Closed-end Credit Find the amount financed, the installment price and the finance charge of an installment loan. Find the installment payment of an installment loan. Find the estimated annual percentage rate (APR).

8. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Key Terms Consumer credit: a type of credit or loan that is available to individuals or businesses. The loan is repaid in regular payments. Installment loan: a loan that is repaid in regular payments. Closed-end credit: a type of installment loan in which the amount borrowed and the interest is repaid in a specific number of equal payments.

9. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Karen purchased a copier on the installment plan with a down payment of $50 and 6 monthly payments of $29.95. Find the installment price. $229.70

10. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Open-end credit: a type of installment loan in which there is no fixed amount borrowed or number of payments. Regular payments are made until the loan is paid off. Finance charges or carrying charges: the interest and any fee associated with an installment loan. Key Terms

11. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Find the Amount Financed, the Installment Price and the Finance Charge of an Installment Loan Cash price: paid all at once at time of purchase Down payment: partial payment Amount financed: total amount paid in regular payments to pay off the balance Installment price: includes all installment payments, finance charges and down payment

12. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Annual Simple Interest Rate Equivalent Example: If you borrowed $1,500 for one year and were charged $165 in interest, you would be paying an interest rate of 11% annually. $165 ÷ $1,500 = 0.11 = 11% If you paid the money back in 12 monthly installments of $138.75, you would not have use of the entire $1,500 for a full year. In effect you would be paying more than the 11% annually.

13. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example with down payment The 7 th Inning purchased a mat cutter for the framing department on the installment plan with a $60 down payment and 12 payments of $45.58. Find the installment price of the mat cutter. Installment Price (IP) = total of installment payments + down payment IP = (12 x $45.58) + $60 IP = $546.96 + 60 = $606.96

14. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example Arthur wants to buy a “home entertainment center” the cash price is $2,850. It can also be purchased in 24 monthly payments of $140. on the installment plan with a down payment of $250. Find the installment price. Installment Price (IP) = total of installment payments + down payment IP = (24 x $140) + $250 IP = $3,360 + 250 = $3,610

15. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Amount of Interest Amount of Interest = Total amount paid – Cash Price = $3,610 - $2,850 = $760

16. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 13.1.2 Find the Installment Payment of an Installment Loan We can find the installment payment if we know the installment price, the down payment and the number of payments. 1.Find the amount financed; subtract the down payment from the installment price. 2.Divide the amount financed by the number of installment payments.

17. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example The installment price of a pool table was $1,220 for a 12-month loan. If a $320 down payment was made, find the installment payment. Installment Price = $1,220 $1,220 - $320 = $900 [$320 is the down payment.] $900 ÷ 12 = $75 The installment payment is $75

18. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Peggy bought a new dryer on an installment plan. She made a down payment of $100. The installment price for a five month loan was $412.50. What was the installment payment? $62.50

19. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved The Basics of Credit for Consumers You will almost certainly need or want to use credit at some point in your life Used properly, credit can make it possible to purchase things that might be difficult to save the entire amount for Used unwisely, credit can wreak havoc in your financial life © 2010 Pearson Education, Inc. All rights reserved 0-19