Chapter 4

Loans and Credit Cards

4.1 Promissory Notes
Interest-Bearing Promissory Notes
• Promissory Note – Your written promise,
or IOU, that you will repay the $ to the
lender on a certain date.
• Interest – What you pay to use the
lender’s $.
• Collateral – Lenders may require a
borrower to deposit or pledge property as
security for a loan.
• Home equity – The difference between
what the home could be sold for and what
is owed on it.
• Principal – amount borrowed on a
promissory note
• Date of the note – date note is signed
• Due date – Date on which $ must be
repaid
P x R x T = I
Principal Rate Time Interest

A. 2500 x 0.11 x 0.5 (6/12) =

P R T
137.50 + 2500 = 2637.50

B. 3500 x 0.12 x 1.5 (18/12) =

630 + 3500 = 4130
 Exact Interest Method
• Note is calculated on number of days
• Exact Interest uses a 365 day year

• Ex: note for 90 days shown as 90/365

C. 5000 x 0.08 x 75/365 =
82.19 + 5000 = 5082.19

D. 3500 x 0.09 x 150/365 =

129.45 + 3500 = 3629.45
 Ordinary Interest Method
• Banker’s Interest Method – Uses a 360
day year – 30 days per month

E. 5900 x 0.12 x 180/360 =

354 + 5900 = 6254

F. 4000 x 0.09 x 120/360 =

120 + 4000 = 4120
 Rate of Interest
Rate of = Interest for 1 Year / Principal
Interest

If interest is given for part of the year have to

find interest for full 1 year.
G. 320 x 3 = 960 / 8000 = 0.12 x 100 = 12%

H. 450 x 4 =1800 / 12000 = 0.15 x 100

=15%
4.2 Discounted Promissory Note
 Discounted Promissory Notes
• Short-term loans – 30, 60, 90 days
• Interest is collected in advance – Bank
Discount
• Since interest is paid in advance it is a
noninterest-bearing note.
Principal x Rate of Discount = Bank Discount

Principal – Bank Discount = Proceeds (what

you get)

A. 9600 x 0.10 x 0.75(9/12) = 720

9600 – 720 =8880

B. 12800 x 0.13 x 0.25(3/12) = 416

12800 – 416 = 12384
 True Rate of Interest
• Interest rate is based on full principal
amount – but you don’t receive full
principal benefits

True Rate = Interest / Actual Amount Interest

Borrowed
C. 25000 – 23250 = 1750 for 6 months need
1 year
1750 x 2 = 3500 / 23250 = 0.151 x 100 =
15.1%

D. 2600 – 2496 = 104 x 3 = 312

312 / 2496 = 0.125 x 100 = 12.5%
 4.3 Interest Tables
• Table can be used as a quick reference

Table based on $100 for 365 day year

Steps to find interest:
1. Principal / $100 =
2. Use time and interest rate in table to find
multiplier x answer from #1
A. 620 / 100 = 6.2
0.3288 x 6.2 = 2.04

B. 550 / 100 = 5.5

0.7288 x 5.5 = 4.01
C. 1320 / 100 = 13.2
0.5479 + 0.5479 = 1.0958 x 13.2 = 14.46

D. 740 / 100 =7.4

1.0192 + 1.0192 =2.0384 x 7.4 = 15.08

E. 350 / 100 = 3.5

0.6575 + 0.6575 = 1.315 x 3.5 = 4.60
 Due Dates
F. March 6 > April 6 > May 6 > June 6
1m 1m 1m

G. March 31 > April 30 > May 31

1m 1m
4.4 Installment Loans
 Installment Price and Finance
Charge
• Down Payment – Reduces the amount of
the loan
• Installment Contract
• Installment price is higher than cash price
because seller adds a finance charge
A. 12 months x $9 = 108 + 25 = 133
B. 6 months x $26.17 = 157.02 + 20
=177.02
 Monthly Installment Payments
• Sometimes need to find the amount of the
payment
C.175 – 25 = 150/15 =$10

D. 1044 – 100 = 944/59 =16 months

 4.7 Credit Card Costs
• Transactions include purchases, payments and fees
• Charges are credits
• Previous balance
• Late fee
• Credit Limit
• Over-the-limit fee
• Cash advance
• Finance charges
• APR
• New Balance
• Minimum Payment Due
A. 3/25
316.15

B. 1.575%
235.13
 Verify Transactions
• Compare receipts to statement
• Unauthorized purchases

C. 491.23-12.99+12.49-56.29
434.44

D. 208.66-48.99-18.79+17.89
158.77
 Cost of Credit Card Use
• Finance Charges and Fees are big factors

E. 45+29+2.68+7.28+9.22+3.98
97.16

F. 25+29+3.15+16
73.15