1. Introduction to Business Ch 26: The Cost of Credit

2. Interest Calculations Interest Rate – The % that is applied to your debt expressed as a fraction or decimal Principal – The amount of the debt to which the interest rate is applied Time Factor – The length of time for which interest will be charged

3. Interest Calculations P * R * T = Interest Time – Months – X/12 Days – X/360 Year – X

4. Interest Calculations P * R * T = Interest Borrow $1000 at 9% for 1 year I = 1000 *.09 * 1 = $90

5. Interest Calculations P * R * T = Interest Borrow $100 at 12% for 2 years I = 100 * 12/100 or.12 * 2 = 12 * 2 = $24 Owe back $124

6. Interest Calculations P * R * T = Interest Borrow $500 at 20% for 60 days I = 500 * 20/100 or.2 * 60/360 = 100 * 1/6 = $16.67 Owe back $516.67

7. Interest Calculations P * R * T = Interest Borrow $1000 at 10% for 4 month I = 1000 * 10/100 or.1 * 4/12 = 100 * 1/3 = 33.34 Owe back $1033.34

8. Maturity Date Maturity Date – Date on which a loan must be repaid – Examples:Today October 17, 2012 MD is one year – Due Date is October 17, 2013 MD is 6 months – Due Date is April 17, 2013 MD is 180 days – Due Date is ? – 180 – (31-17) = 166 » Nov -30 = 136 » Dec -31 = 105 » Jan -31 = 74 » Feb -28 = 46 » March -31 = 15 » Due Date is April 15

9. Installment Interest Installment Loan – repay loan in partial payments Installment – Each payment Borrower is given a schedule of payments or a payment book that show how much is to be paid each month

10. Installment Interest Example: Borrow $100 at 10% for 1 year Interest = 100 *.1 *1 = $10 Owe back $110 Installment = 110 / 12 = $9.16 Our last payment will include the additional 8 cents

11. Buy a new Car – Borrow $30,000 at 4% for 5 years Interest = 30000 *.04 * 5 = 1200 * 5 = 6000 Owe back 36000 in 5 years Installments = 36000/60 = $600

12. Finance Charges Annual Percentage Rate (APR) – States the percentage cost of credit on a yearly basis – Required by law to be disclosed Service Fees – involve the time and money it takes to investigate your credit history, process your loan, keep record of your payments

13. Finance Charges Credit Insurance – Special insurance that repays the balance of the amount owed if the borrower dies or becomes disabled prior to full settlement of the loan