Lecture Practical business math procedures (11/e) - Chapter 14: Installment buying

In this chapter students will be able to: 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, calculate the finance charges on revolving charge credit card accounts.

INSTALLMENT BUYING

Chapter Fourteen

1 Calculate the amount financed, finance charge, and deferred payment

LU 14-1: Cost of Installment Buying

Learning unit objectives

LU 14-2: Revolving Charge Credit Cards

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

Amount financed (AF) –

the amount actually borrowed

AF = Cash price Down payment

Deferred payment price (DPP) –

the total of all monthly payments plus

the down payment

DPP = Total of all + Down monthly payments payment

Cost of Installment Buying

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

Finance charge = Total of all Amount monthly payments financed

Deferred payment Price = Total of all + Down

monthly payments payments

$9,045 = $9,345 $300

($194.38 x 60)

$11,962.80 = $11,662.80 + $300

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 14.1 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

Annual Percentage Rate (APR)

Calculating APR rate by table

Finance charge x $100 = Table 14.1 Amount financed lookup

number

$2,617.80 x 100 = $28.94 $9,045

Between 10.25% 10.50%

accurate to

the nearest

1/4 of 1%

Annual Percentage Rate Table per $100

(Table 14.1)

# of Payments 10.00% 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00% 12.25% 12.50%

36 16.16 16.58 17.01 17.43 17.86 18.29 18.71 19.14 19.57 20.00 20.43

37 16.62 17.06 17.49 17.93 18.37 18.81 19.25 19.69 20.13 20.58 21.02

38 17.08 17.53 17.98 18.43 18.88 19.33 19.78 20.24 20.69 21.15 21.61

39 17.54 18.00 18.46 18.93 19.39 19.86 20.32 20.79 21.26 21.73 22.20

40 18.00 18.48 18.95 19.43 19.90 20.38 20.86 21.34 21.82 22.30 22.79

41 18.47 18.95 19.44 19.93 20.42 20.91 21.40 21.89 22.39 22.88 23.38

42 18.93 19.43 19.93 20.43 20.93 21.44 21.94 22.45 22.96 23.47 23.98

43 19.40 19.91 20.42 20.94 21.45 21.97 22.49 23.01 23.53 24.05 24.57

44 19.86 20.39 20.91 21.44 21.97 22.50 23.03 23.57 24.10 24.64 25.17

45 20.33 20.87 21.41 21.95 22.49 23.03 23.58 24.12 24.67 25.22 25.77

46 20.80 21.35 21.90 22.46 23.01 23.57 24.13 24.69 25.25 25.81 26.37

47 21.27 21.83 22.40 22.97 23.53 24.10 24.68 25.25 25.82 26.40 26.98

48 21.74 22.32 22.90 23.48 24.06 24.64 25.23 25.81 26.40 26.99 27.58

49 22.21 22.80 23.39 23.99 24.58 25.18 25.78 26.38 26.98 27.59 28.19

50 22.69 23.29 23.89 24.50 25.11 25.72 26.33 26.95 27.56 28.18 28.80

60 27.48 28.22 28.96 29.71 30.45 31.20 31.96 32.71 33.47 34.23 34.99

Annual percentage rate table per $100 (partial)

Calculating the Monthly Payment by

Formula

Finance charge + Amount financed Number of payments of loan

The pickup truck advertisement below shows a $194.38 monthly

payment We can check this by formula and by table lookup

$2,617.80 + $9,045

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

Calculating the Monthly Payment by Table

Step 1 Divide the loan amount by $1,000.

$9,045 = 9.045

$1,000

Loan Amortization Table (Table 14.2)

(Monthly payment per $1,000 to pay principal and

interest on installment loan)

(Partial)

Terms in

6 170.34 170.58 170.83 171.2 171.56 171.81 172.05 172.3 172.55

12 86.76 86.99 87.22 87.46 87.92 88.15 88.38 88.62 88.85

18 58.9 59.15 59.37 59.6 60.06 60.29 60.52 60.75 60.98

30 36.66 36.89 37.12 37.35 37.81 38.04 38.28 38.51 38.75

36 31.11 31.34 31.57 31.8 32.27 32.5 32.74 32.98 33.21

42 27.15 27.38 27.62 27.85 28.32 28.55 28.79 29.03 29.28

48 24.18 24.42 24.65 24.77 25.36 25.6 25.85 26.09 26.33

54 21.88 22.12 22.36 22.59 23.07 23.32 23.56 23.81 24.06

60 20.04 20.28 20.52 20.76 21.25 21.49 21.74 21.99 22.24

• Revolving charge account

allows the buyer open-end credit

up to the maximum credit limit

Fair Credit

and

Charge

Card

Disclosure

Act of

1988.

Revolving Charge Credit Cards

interest rate times the previous month’s balance (outstanding balance)

interest and then the outstanding balance (US Rule)

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:

Source: www.bankrate.com

Schedule of Payments

(Table 14.3)

 1 $8,000.00 $120.00 $500 $380.00 $7,620.00

2 $7,620.00 $114.30 $500 $385.70 $7,234.30

3 $7,234.30 $108.51 $500 $391.49 $6,842.81

(.015 x $7,234.30) ($500 - $108.51) ($7,234.30-391.49)

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

Calculating Average

Daily Balance

Step 5 Finance charge = Rate per month x Average daily balance

Step 1 Calculate the daily balance or amount owed at the end of each day

during the billing cycle:

balance = balance + + Purchases Payments advances

31-day billing cycle

Calculating Average

Daily Balance

Rate 2% per month on average daily balance.

Month due Interest payment in balance outstanding

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

Calculating Average

Daily Balance

Rate 2% per month on average daily balance.

that follows

Days Current Daily Balance Extension

31

Calculating Average Daily Balance

31 - 21

(7+4+5+5)