Team 4: Consumer Loans

1
Team 4Consumer Loans

• Brian Kanzigg
• Chase Nicholson
• Daniel Bennett
• Doris Huang
• Nate Schisler

2
Chapter 7 DC 1

• Karou is considering different options for
  financing the 12,000 balance on her planned new
  car purchase. The cheapest advertised rate among
  the local banks is 7 percent for a 48-month car
  loan. The current rate on her revolving home
  equity line is 8.5 percent. Karou is in the 27
  percent federal tax bracket and the 5.75 percent
  state tax bracket.

3
1. Determine which loan she should choose. Defend
your answer

• Home Equity Loan has a tax savings of 593,
  which is greater than the interest savings of
  404 from the lower rate on the bank loan.

4
2. Calculate the payments for her. Assume both
loans have 48-month amortization and use the
simple interest method.
5
3. In a discussion with her father about
financing her new car, Karou was surprised to
hear that he once financed a car with the add-on
method of interest calculation. He planned to
repay the 2,000 loan within one year but was
able to do so after 9 months because of a bonus
he earned at work. The interest rate was 5
percent. Calculate the monthly payments, as well
as the final payment to pay off the loan. How
much interest was "saved" or rebated using this
method of financing and the Rule of 78?

• Monthly payment - 175
• Final Payment - 507.69
• Interest Saved - 7.69

6
4. Assume Karou's father could finance 2,000
today at 5 percent using the simple interest
method of calculation. How much would the
payments be? Calculate the final payment to pay
off the loan after 9 months. How much interest
was "saved"?

• Monthly payment 171.21
• Final Payment - 509.39
• Interest Saved - 4.25

7
5. Considering the information in questions 3 and
4, calculate the difference in finance charges
assuming neither loan was paid off early.

• Difference in finance charges
• 100 54.58
• 45.42

8
6. Assuming Karou did not have access to the home
equity credit line, what factors might she
consider to reduce the lender's risk and
therefore "buy" herself a lower cost loan?

• Make larger down payment to reduce rate
• Offer more collateral
• Make larger monthly payments to reduce interest
  paid on principal