Chapter 14 Installment Buying Rule of 78 and

#14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives LU 14. 1 Cost of Installment Buying 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 14 -2

#14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives Paying Off Installment Loan before LU 14. 2 Due Date 1. Calculate the rebate and payoff for Rule of 78 14 -3

#14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives LU 14. 3 Revolving Charge Credit Cards 1. Calculate the finance charges on revolving charge credit card accounts 14 -4

Cost of Installment Buying 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 14 -5 Deferred payment price (DPP) - the total of all monthly payments plus the down payment. DPP = Total of all + Down monthly payments payment Installment loan - a loan paid of in a series of equal periodic payments. Payments include interest and principal.

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. 14 -6 Amount financed = Cash price - Down payment $9, 045 = $9, 345 - $300 Finance Charge = Total of all - Amount monthly payments financed $2, 617. 80 = $11, 662. 80 - $9, 045 ($194. 38 x 60) Deferred payment = Total of all + Down Price monthly payments $11, 962. 80 = $11, 662. 80 + $300

Calculating APR by Table 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. 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 1. Divide the finance charge by amount financed and multiply by $100 to get the table lookup factor. 14 -7

Annual Percentage Rate (APR) Truth in ct ending A L be PR must A to accurate st the neare 1/4 of 1% Calculating APR rate by table Finance charge x $100 = Table 14. 1 Amount financed lookup # $2, 617. 80 x 100 = $28. 94 $9, 045 Between 10. 25% - 10. 50% 14 -8

Table 14. 1 - Annual Percentage Rate Table per $100 14 -9

Calculating the Monthly Payment by Formula The pickup truck advertisement on page 340 showed a $194. 38 monthly payment. We can check this by formula and by table lookup. Finance charge + Amount financed Number of payments of loan $2, 617. 80 + $9, 045 60 $194. 38 14 -10

Calculating the Monthly Payment by Table Step 3. Multiply the quotient in Step 1 by the factor in Step 2 9. 045 x $21. 49 = $194. 38 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 1. Divide the loan amount by $1, 000 $9, 045 = 9. 045 $1, 000 14 -11

Table 14. 3 - Rebate Fraction Table based on Rule of 78 60 Months 14 -12

Calculating Rebate and Payoff for 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 -13

Paying Off Installment Loan before Due Date What is the rebate of the finance charge and payoff if the pickup truck loan were paid off after 27 months (instead of 60)? 1. 60 x$ 194. 38 = $11, 662. 80 - 27 x $194. 38 = $ 5, 248. 26 Bal. Out. = $ 6, 414. 54 4. 561 - Sum of digits 33 mnths 1, 830 - Sum of digits 60 mnths 2. $11, 662. 80 - $ 9, 045. 00 $ 2, 617. 80 = Total fin. chr. 5. 561 x $2, 617. 80 = $802. 51 1, 830 3. 60 - 27 = 33 Pymts. remaining 14 -14 6. $6414. 54 - $802. 51 = $5, 612. 03

Revolving Charge Credit Cards air Credit F ge and Char Card e Disclosur. ct of 1988 A Revolving charge account - allows the buyer openend credit up to the maximum credit limit. 14 -15 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)

Paying Just the Minimum, and Get 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: www. bankrate. com 14 -16

Table 14. 4 - Schedule of Payments Monthly payment number Outstanding balance due 1 1/2% interest payment 1 $8, 000. 00 $120. 00 Amount of monthly payment $500 (. 015 x $8, 000) 2 $7, 620. 00 $114. 30 $7, 234. 30 $108. 51 (. 015 x $7, 234. 30) 14 -17 $380. 00 ($500 - $120) $500 (. 015 x $7, 620) 3 Reduction in balance due $385. 70 Outstanding balance due $7, 620. 00 ($8, 000 - 380) $7, 234. 30 ($500 - $114. 30) ($7, 620 - 385. 70) $500 $391. 49 $6, 842. 81 ($500 - $108. 51) ($7, 234. 30 -391. 49)

Calculating Average Daily Balance Step 5. Finance charge = Rate per month x 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 advances 14 -18

Calculating Average Daily Balance Calculate the average daily balance and finance charge from the information that follows. 8/20 8/27 8/31 9/5 9/10 30 - day billing cycle Billing date Previous balance Payment Charge Staples Payment Cash advance Rate 2% per month on average daily balance. 14 -19 $ 50 cr. 30 10 cr. 60 $210

Calculating Average Daily Balance Step 1 (7+4+5+5) 31 -21 Days Current daily bal. Extension 7 4 5 5 10 31 Step 2 $1, 470 640 950 900 2, 400 Step 3 $6, 360 Step 4 $6, 360 = $205. 16 31 $210 160 ($210 - $50) 190 ($160+$30) 180 ($190 - $10) 240 ($180 + $60) Average daily balance = Finance charge = $4. 10 (205. 16 x. 02) 14 -20 Step 5