Kinh tế học - Chapter 14: Installment buying, rule of 78, and revolving charge credit cards

Chapter 14Installment Buying, Rule of 78, and Revolving Charge Credit CardsCalculate the amount financed, finance charge, and deferred paymentCalculate the estimated APR by table lookupCalculate the monthly payment by formula and by table lookupInstallment Buying, Rule of 78, and Revolving Charge Credit Cards#14Learning Unit ObjectivesCost of Installment BuyingLU14.1Calculate the rebate and payoff for Rule of 78Installment Buying, Rule of 78, and Revolving Charge Credit Cards#14Learning Unit ObjectivesPaying Off Installment Loan before Due DateLU14.2Calculate the finance charges on revolving charge credit card accountsInstallment Buying, Rule of 78, and Revolving Charge Credit Cards#14Learning Unit ObjectivesRevolving Charge Credit CardsLU14.3Finance charge (FC) - the interest charge.FC = Total of all - Amount monthly payments financedInstallment loan - a loan paid of in a series of equal periodic payments. Payments include interest and principal.Amount financed (AF)- the amount actually borrowed.AF = Cash Price - Down PaymentDeferred payment price (DPP) - the total of all monthly payments plus the down payment.DPP = Total of all + Down monthly payments paymentCost of Installment BuyingCost of Installment BuyingMary 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$9,045 = $9,345 - $300Finance 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 payment payments$11,962.80 = $11,662.80 + $300Calculating APR by TableStep 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 tableFinance charge x $100 = Table 14.1Amount financed lookup #$2,617.80 x 100 = $28.94 $9,045Between 10.25% - 10.50% Truth in Lending ActAPR must be accurate tothe nearest1/4 of 1%Table 14.1 - Annual Percentage Rate Table per $100Calculating the Monthly Payment by Formula Finance charge + Amount financedNumber of payments of loan$2,617.80 + $9,04560$194.38The pickup truck advertisement on page 340 showed a $194.38 monthly payment. We can check this by formula and by table lookup.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 29.045 x $21.49 = $194.38 Calculating the Monthly Payment by TableStep 1. Divide the loan amount by $1,000$9,045 = 9.045$1,000Table 14.3 - Rebate Fraction Table based on Rule of 7860 MonthsCalculating Rebate and Payoff for Rule of 78Rule of 78 - A variation of the U. S. Rule. The Rule of 78 is not allowed for loans of 61 months or longerStep 1. Find the balance of the loan outstandingStep 2. Calculate the total finance charge Step 3. Find the number of payments remainingStep 4. Set up the rebate fraction from Table 14.3Step 5. Calculate the rebate amount of the finance chargeStep 6. Calculate the payoffPaying Off Installment Loan before Due DateWhat is the rebate of the finance charge and payoff if the pickup truck loan were paid off after 27 months (instead of 60)?1. 60 x$ 194.38 = $11,662.80 - 27 x $194.38 = $ 5,248.26 Bal. Out.= $ 6,414.542. $11,662.80 - $ 9,045.00 $ 2,617.80 = Total fin. chr.3. 60 - 27 = 33 Pymts. remaining4. 561 - Sum of digits 33 mnths 1,830 - Sum of digits 60 mnths 5. 561 x $2,617.80 = $802.51 1,830 6. $6414.54 - $802.51 = $5,612.03Revolving 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 CardsInterest 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 FastBalanceTotal CostTotal Time$1,000$2,590.3517 years, 3 months$2,500$7,733.4930 years, 3 months$5,000$16,305.3440 years, 2 monthsThe cost – in years and dollars-of paying the minimum 2% of balances on credit cards charging 17% annual interestSource: www.bankrate.comTable 14.4 - Schedule of PaymentsMonthly Outstanding Amount of payment balance 1 1/2% interest monthly Reduction in Outstandingnumber due payment payment balance due balance due 1 $8,000.00 $120.00 $500 $380.00 $7,620.00 (.015 x $8,000) ($500 - $120) ($8,000 - 380) 2 $7,620.00 $114.30 $500 $385.70 $7,234.30 (.015 x $7,620) ($500 - $114.30) ($7,620 - 385.70) 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 balances.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 BalanceStep 1. Calculate the daily balance or amount owed at the end of each day during the billing cycleDaily = Previous + Cash + Purchases - Paymentsbalance balance advancesStep 5. Finance charge = Rate per month x Average daily balance 30 - day billing cycle8/20 Billing date Previous balance $2108/27 Payment $ 50cr.8/31 Charge Staples 309/5 Payment 10cr.9/10 Cash advance 60Calculating Average Daily BalanceCalculate the average daily balance and finance charge from the information that follows.Rate 2% per month on average daily balance.Days Current daily bal. Extension7 $210 $1,4704 160 ($210- $50) 6405 190 ($160+$30) 9505 180 ($190 - $10) 90010 240 ($180 + $60) 2,40031 $6,360 Average daily balance = $6,360 = $205.16 31 Finance charge = $4.10 (205.16 x .02)Step 1Step 2Step 3Step 431-21Calculating Average Daily BalanceStep 5(7+4+5+5)