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Cost of Credit

Cost of Credit. Ch. 18-2 PoB 2011. Finding Interest. Interest – is the cost of using some one else’s money It is the amount of interest paid on a loan or charge account that should be clearly understood Principal (P) – amount of the loan

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Cost of Credit

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  1. Cost of Credit Ch. 18-2 PoB 2011

  2. Finding Interest • Interest – is the cost of using some one else’s money • It is the amount of interest paid on a loan or charge account that should be clearly understood • Principal (P) – amount of the loan • Interest Rate (R) - percent of interest charged or earned • Time (T) - length of time for which interest will be charged

  3. Simple Interest • Simple Interest – usually occurs on single-payment loans • Interest = Principal x Rate x Time • I = P x R x • Time can occur in days and months

  4. Maturity Dates • Maturity Date - the date on which the loan must be paid • When the time of the loan is stated in months, the date of maturity is the same day of the month on which the loan was made • When the time of the loan is stated in days, you must count the exact number of days to find the date of maturity

  5. Installment Interest • Installment Loan – a loan that you repay in partial payments • Where each payment is an Installment • Gives the borrower a schedule of payments • You sign a promissory note for the total amount • Amortization Schedule – the payment table of principal and interest over time

  6. Finance Charges • Annual Percentage Rate (APR) – is a disclosure required by law • States the percentage cost of credit on a yearly basis • Includes other charges that may be made • Service Fees – involve the time and money it takes a creditor to investigate your credit history, process your loan or charge account applications, and keep records of your payments and balances • Uncollectible Accounts - the cost of collecting from those who do not pay their accounts • May be passed on to other borrowers

  7. Finance Charges • Total Dollar Charge – to make you aware of the total cost of credit • Federal law requires that the lender must tell you the finance charge • Finance Charge – is the total dollar cost of the credit, including interest and all other charges • Compare Credit Costs • Be sure to compare the total cost of credit among alternative sources • Check with several lenders and compare APRs • Shop around when getting a loan • Remember you are using future income when using credit

  8. Review What three things are necessary to calculate interest? What does APR represent?

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