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# Chapter 14

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1. Chapter 14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards

2. #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives Cost of Installment Buying LU14.1 • 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

3. #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives Paying Off Installment Loan before Due Date LU14.2 • Calculate the rebate and payoff for Rule of 78

4. #14 Installment Buying, Rule of 78, and Revolving Charge Credit Cards Learning Unit Objectives Revolving Charge Credit Cards LU14.3 • Calculate the finance charges on revolving charge credit card accounts

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

6. 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 \$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 payment payments \$11,962.80 = \$11,662.80 + \$300

7. 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.

8. Annual Percentage Rate (APR) Calculating APR rate by table Finance charge x \$100 = Table 14.1 Amount financed lookup # Truth in Lending Act APR must be accurate to the nearest 1/4 of 1% \$2,617.80 x 100 = \$28.94 \$9,045 Between 10.25% - 10.50%

9. Table 14.1 - Annual Percentage Rate Table per \$100

10. Calculating the Monthly Payment by Formula Finance charge + Amount financed Number of payments of loan \$2,617.80 + \$9,045 60 \$194.38

11. 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

12. Table 14.2 - Loan Amortization Table(Monthly payment per \$1,000 to pay principal and interest on installment loan) (Partial)

13. Calculating Rebate and Payoff for Rule of 78 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. Paying Off Installment Loan before Due Date What is the rebate of the finance charge and payoff if the car loan were paid off after 27 months? 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 5. 561 x \$2,617.80 = \$802.51 1,830 2. \$11,662.80 - \$ 9,045.00 \$ 2,617.80 = Total fin. chr. 6. \$6414.54 - \$802.51 = \$5,612.03 3. 60 - 27 = 33 Pymts. remaining

15. Revolving Charge Credit Cards Interest charges are based on the interest rate times the previous month’s balance (outstanding balance) Fair Credit and Charge Card Disclosure Act of 1988. Revolving charge account - allows the buyer open-end credit up to the maximum credit limit. Payments are first applied towards interest and then the outstanding balance (US Rule)

16. 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 Source: www.bankrate.com

17. Table 14.4 - Schedule of Payments Monthly Outstanding Amount of payment balance 1 1/2% interest monthly Reduction in Outstanding number 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)

18. 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 balance advances

19. Calculating Average Daily Balance 30 - day billing cycle 6/20 Billing date Previous balance \$450 6/27 Payment \$ 50cr. 6/30 Charge JCPenney 200 7/9 Payment 40cr. 7/12 Cash advance 60

20. Calculating Average Daily Balance DaysCurrent daily bal.Extension 7 \$450 \$3,150 3 400 (\$450- \$50) 1,200 9 600 (\$400+\$200) 5,400 3 560 (\$600 - \$40) 1,680 8 620 (\$560 + \$60) 4,960 30 \$16,390 Average daily balance = \$16,390 = \$546.33 30 Finance charge = \$546.33 x .015 = \$8.19 Step 1 Step 2 (7+3+9+2) Step 3 30-22 Step 4 Step 5

21. Problem 14-10: \$31,770 \$1,000 = \$31.77 x 20.28 = \$664.2956 = \$644.30 Solution: \$35,300 - 3,530 down payment \$31,770 loan amount

22. Problem 14-12: a. Amount financed: \$7,880 - 0 =\$7,880 Selling Down Amount price payment financed - = Solution: b. Finance charge: (\$185.53 x 60) - \$7,880 = \$3,251.80 C. APR by table lookup: \$3,251.80 X \$100 = \$41.27 \$7,880.00 Between 14.50% and 14.75% d. Monthly payment by formula: \$3,251.80 + \$7,880.0 = \$185.53 60 e. Monthly payment by table lookup (use 14.50%): \$7,880 = 7.88 \$23.53 = \$185.42 \$1,000

23. Problem 14-17: Solution: First America Bank U.S. Bank \$488.26 x 48 = \$23,436.48 \$497.70 x 48 = \$23,889.60 - 20,000.00 - 20,000.00 \$ 3,436.48 finance charge \$ 3,889.60 finance charge \$3,436.48 x \$100 = \$17.1824 \$3,889.60 x \$100 = \$19.448 \$20,000 \$20,000 = Between 8.00% and 8.25% = Between 8.75% and 9%

24. Problem 14-18: Solution: No. of days Current Of current balance Balance Extension 6 \$ 800 \$4,800 5 740 3,700 7 990 6,930 4 970 3,880 6 (28 – 22) 1,170 7,020 \$26,330 ÷ 28 = \$940.35714

25. Problem 14-19: Solution: Monthly 1½ % Amount of Outstanding Payment Outstanding interest monthly Reduction in Balance due Number balance due payment payment balance due 1 \$500.00 \$7.50 \$100.00 \$92.50 \$407.50 (\$500 x .015) (\$100.00 - \$7.50) (\$500 - \$92.50) 2 \$407.50 \$6.11 \$100.00 \$93.89 \$313.61 (\$407.50 x .015) (\$100.00 - \$6.11) (\$407.50 - \$93.89) 3 \$313.61 \$4.70 \$100.00 \$95.30 \$218.31 (\$313.61 x .015) (\$100.00 - \$4.70) (\$313.61 - \$95.30)