Installment Buying

• The amount financed is what the consumer borrows.
• The finance charge is what the bank gets in interest.
• Example: Number 2, page 435

  
  Price = 2450
  Down Payment = 550
  Amount Financed = 2450-550 = 1900
  Payments = 24
  Monthly Payment = 94.50
  
  Total Amount = 94.50 x 24 = 2268
  
  Finance Charge = 2268-1900 = 360
      

• We can find the APR using the chart on page 429
  • To do this, we need to calculate the finance charge per $100
  • this is

    
    	Finance Charge
           ---------------- x 100
           Amount Financed
    	

  • So for number 8, page 436

    The finance charge per 100 is 8.59
    The Period of the loan is 12 months.
    
    So there is an APR of 15.5%
          

• Another example, number 12, page 436

  Cost = $18,000
  Down = $600
  time = 60
  monthly payment = 385
  
  Amount Financed = 18000-600 = 17,400
  Total Amount = 385 x 60 =  23,100
  
  Finance Charge = 23,100 - 17,400 = 5700
  
  Amount Financed per $100     5700/17400x 100 =  32.75
  This represents an 12% finance charge.
      

• If you wish to pay a loan off early, there are two methods,
  • The Actuarial Method
  • The rule of 78
• To do the acturarial method we use the formula

           
  	  kRV
      u = --------
  	100 + V
  
  	u = unearned interest
  	k = remaining number of payments excluding current payment
  	R = regular monthly payment
  	V = Finance charge per $100, for a loan for the same amount
  	    with k monthly payments.
      

• For example: (problem 14, )

  k = 60-24 = 36
  R =  385
  V = 19.57
  
  u =   36*385*19.57/119.587 =  2268.46
      

• The payoff amount is payment for the current loan, plus the remaining payments - unearned interest.
• Example continued

  payoff = 385 + 385 x 36 - 2268.46
         = 11,976.54
      

• The rule of 78 has a different payoff formula

      k(k+1)
  u = ------ x F
      n(n+1)
  
      u = unearned interest
      k = remaining number of payments
      n = original number of payments
      F = original finance charge.
      

• Example continues

  k = 36 (From above)
  n = 60
  F = 5,700
  
   u = 36*37/(60*61) x  $5700 =  $2074.42
  
   And the payoff is
  
  payoff = 385 + 385 x 36 - 2074.42 = 12,170,58
      

Homework