INSTALLMENT BUYING

In the US, a lot of people celebrate their college

graduation by getting a new car. Unless you are
very wealthy , you can buy it in cash or else you
need to get a loan. In this case, you will be doing
what is called installment buying . This is when
an item is purchased and the buyer pays for it by
making periodic partial payments, or installments
There are natural advantages and disadvantages
to installment buying. The most obvious
advantage is that it allows you to buy an item
that you don’t have enough money to pay for, and
use it while you are raising that money. The most
obvious disadvantage is that you pay interest on
the amount, so you end up paying more for the
item.
FIXED INSTALLMENT LOANS

 A fixed installment loan is a loan that is repaid

in equal payments . Sometimes the buyer will
pay part of the cost at the time of purchase.
This is known as down payment.
OTHER TERMS USED TO DESCRIBE
INSTALLMENT LOANS
Amount Financed = Price of item – Down payment

Total Installment Price = Sum of all payments -

Down payment

Finance Charge =Total installment price –

Price of item
CALCULATING INFORMATION ABOUT A CAR
LOAN
 Cathy bought a 2 - year old Innova for
$ 12, 260. Her down payment was $ 3,000
she will have to pay $231.50 for 48 months .
Find the
a. amount financed,
b. the total installment charge
c. the finance charge.
Amount financed = Cash price – Down payment
= $ 12,260 - $ 3,000
= $ 9, 260

Total installment price = total monthly payments

+ Down payment
= ( $ 231.50 X 48 ) + $ 3,000
= $14, 112.00
Finance charge = Total installment price --
Cash price
= $14, 112.00 - $ 12, 260.00
= $ 1, 852.00
COMPUTING MONTHLY PAYMENT

After a big promotion , a young couple bought

$9,000 worth of furniture. The down payment
was $1,000. The balanced was financed for 3
years at 8 % simple interest per year.
a. Find the amount financed.

b. Find the financed charge (interest).

c. Find the total installment price.

d. Find the monthly payment.

a. Amount financed = Price of item – Down payment
= $ 9,000 - $ 1,000
= $ 8,000

b. To find the finance charge

I = Prt
= ($8,000 )(0.08)(3)
= $ 1,920
c. Total installment = cost of furniture + finance
charge = $ 9,000+ $ 1,920
= $ 10, 920
d. To calculate the monthly payment, divide the
amount finance plus finance charge by the
number of payments
Monthly payment = ( $ 8,000 + $1,920) ÷ 36
= $ 275.56
So far we discussed example of closed-ended
credit, a credit with fixed number of payments
and specific pay-off date. We turn our attention to
open-ended credit , where there is no fixed
number of payments or pay-off date. The most
common example is credit cards. Since more
people use credit cards for convenience, an
understanding of open –ended credit is more
important than ever.
THE UNPAID BALANCE METHOD

With the unpaid balance method interest is

charge only on the balance form the previous
month.
COMPUTING CREDIT CARD FINANCE CHARGE

For the month of April, Lily had an unpaid

balance of $356.75 at the beginning of the
month and made purchases of $ 436.50. A
payment of $200.00 was made during the
month. The interest on the unpaid balance is
1.8% per month Find the finance charge and the
balance on May 1.
1. Find the finance charge on the unpaid balance
using simple interest formula.
I = Prt
= ($356.75)(0.018)(1)
= $ 6.42 this is the finance charge
2. To the unpaid balance, add the finance charge
and the purchases of the month , then subtract the
new payment to get the new balance
New balance = ($356.75 + $6.42 + $436.50)
- $200
= $599.67 new balance on May 1
AVERAGE DAILY BALANCE METHOD

Another way to make money from credit card

users is to use the daily balance method for
computing finance charge. In this method the
balance of each day of the month is used to
compute the an average daily balance and
interest is computed on that average.
COMPUTING CREDIT CARD FINANCE CHARGE

 Betty’s credit card statement showed the

following transactions during the month of
August.
August 1 Previous balance $165.50
August 7 Purchases 59.95
August 12 Purchases 23.75
August 18 Payment 75.00
August 24 Purchases 107.43
Find the
a. average daily balance,

b. the finance charge for the month,

c. the new balance on September 1.

The interest rate is 1.5% per month on the

average daily balance.
1. Find the balance of each transaction
August 1 $165.50
August 7 $165.50 + $59.95 = $ 225.45
August 12 $225.45 + $23.75 = $ 249.20
August 18 $249.20 - $75.00 = $ 174.20
August 24 $174.20 + $107.43 =$281.63
2. Find the number of days for each balance
Date Balance Days Calculation
August 1 $165.60 6 7-1=6
August 7 $225.45 5 12 - 7 = 5
August 12 $249.20 6 18 – 12 = 6
August 18 $174.20 6 24 - 18 = 6
August 24 $281.63 8 31 -24 + 1 = 8
3. Multiply each balance to the number of days and
add these product.
Date Balance Days Calculation
August 1 $165.60 6 $993.00
August 7 $225.45 5 $1,127.25
August 12 $249.20 6 $1,495 20
August 18 $174.20 6 $1,045.20
August 24 $281.63 8 $2,253.04
$6,913.69
 $ 6,913.69
4. Average daily balance =
31
= $223.02
5. Finance Charge = ($223.02)(0.015)
= $3.35
6. New Balance = $281.63 + $3.35
= $284.98
 PROCEDURE FOR THE AVERAGE BALANCE
METHOD
1. Find the balance as of each transaction.
2. Find the number of days for each balance.
3. Multiply the balances by the number of days
and find the sum.
4. Divide the sum by the number of days in a
month.
5. Find the finance charge (multiply) the average
daily balance by the monthly rate.
6. Find the new balance (add the finance charge
to the balance as of the last transaction.
 HOME OWNERSHIP

For many people the day they buy their first

house is one of the proudest of their life. There is
nothing that compares to the feeling of knowing
that the house is all yours. But the buying
process is tremendously intimidating. There are
new documents to sign, specially if one secured
a large loan to buy a home. The most common
home loan are paid over a 30- year span.
 MORTGAGES

A mortgage is a long - term loan where he

lender has the right to seize the property
purchased if the payments are not made.
There are many types of mortgages :
1. A fixed –rate mortgage means that the rate
of interest remains the same for the entire term
of the loan. The payments (usually monthly)
stay the same.
2. An adjustable- rate mortgage means that
the rate of interest may fluctuate (i.e. increase
or decrease) during the period of the loan.

Some lending institutions will allow you to

make graduated payments. This means that
even though the interest does not change for
the period of the loan , you can make smaller
payments in the first few years and and larger
payments at the end of the of the loan period.
 PROCEDURE FOR FINDING THE MONTHLY
PAYMENT FOR A FIXED-RATE MORTGAGE
1 Find the down payment.
2. Subtract the down payment from the cost of
the home to find the principal of the mortgage.
3. Divide th principal by 1000.
4. Find the number in the table that
corresponds to the interest rate and the term of
the mortgage.multiply that number by the
number obtained in step 3 to get the monthly
payment.
FINDING THE MONTHLY MORTGAGE PAYMENTS

The Chan family plans to buy a home for

$174,900, and have been offered a 30-year
mortgage at the rate if 5.5%. If they make the
20% down payment.
What will be their monthly payment be with this
loan?
1. Find the down payment
30% of $174,900 = $34,980.
2. Subtract the down payment from the cost of the
home to get the principal.
$174,900 - $34,980 = $ 139, 920
3. Divide by 1000
$ 139, 920
= $139.92
1000
4. Find the value in the table for a 30 –year
mortgage at 5.5%.It is $5.68.
5. Multiply the value from step 3
(139.93) ($5.68) = $794.75 monthly payment.
FINDING TOTAL INTEREST ON A MORTGAGE

Find the total interest the Chan family would

pay if they take the loan in the first example.
On a 30-year mortgage
there are (30)(12) = 360 payments.
Sine the monthly payment would be $ $794.75
($794.75)(360) = $286,110
this is the total payment
We subtract the amount financed in the first
example $286,110-$ 139,920 = $146, 190
the interest paid exceeds the principal of the
loan by $6,000.
COMPUTING AN AMORTIZATION SCHEDULE

After securing a mortgage the lending institution

will prepare an amortization schedule. This
schedule shows what part of the monthly
payment is paid on the principal and what part of
mnthly payment is paid on interest
PREPARING AN AMORTIZATION SCHEDULE

Compute the first two months of an

amortization schedule of the loan in
Example 1

Payment Interest Payment on Alance

number Pricipal Of Loan
1 $ 641.30 $ 153.45 $ 139,766.55
2 $640.60 154.15 $139,612.40