SBM 4C Financial Management

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SBM 4C Financial Management

• Loan Payments, Credit Cards, and Mortgages

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Introduction

• Soon after we graduate high school, we will have
  many new loans and payments that we will be
  responsible for. Such as credit card debts, and
  student loans.
• With these types of loans and credit you will
  have to pay back the initial amount and interest
  added to this amount.

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Loan Basics

• Your first year of college you borrow
  1,500 in student loans.
• Say that the interest rate is 3 monthly 1,500
  x 345---gt you would add this to your principal
  of 1,500.
• Adding the interest to your principal you would
  pay 1,545.
• If you were only to pay that 45 in interest you
  would be paying 45 a month for the rest of you
  life.

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• To pay off you student loan you would need to pay
  the monthly interest rate and part of the
  principal.
• Your student loans, ifyou only paid 35
  thatmonth, then the collegeadd 3 interest to
  the 1510 left in your loan

The principal is the amount of money owed at
any particular time.
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• If you were to pay 65 a month of your student
  loan though, you would pay the interest for that
  month, and part of the principal, bringing down
  you principal to 1,480. Then your principal
  would be 1480 and the 3 interest would be added
  onto that, making the new principal with interest
  1524.40

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Installment Loans

• Many people prefer to pay our their loans with a
  regular monthly payment simply because it makes
  it easier to budget plan. This type of payment
  method is call an Installment Loan.

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Installment Loan Formula
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Example 1

• Suppose that you wanted to pay off a loan of
  1,400, with an interest of 14, with 6 equal
  monthly payments.
• What would be your monthly payment amount?

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Answer to Example One

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Principal and Interest for Installment Loans

• At the beginning of your monthly payments, much
  of the payment goes toward the interest and not
  much to the principal. But because you are
  paying off the principal as well as the interest,
  you interest payment goes down, and you end up
  paying more to the principal of the loan as time
  goes on.

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Example 2

• Suppose you have student loans totaling 8,500
  when you graduate from college. The interest
  rate if APR8 and the loan term is 9 years.
• What are your monthly payments? How much will
  you pay over the lifetime of the loan? What is
  the total interest you will pay on the loan?

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Answer to Example Two
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More on Example Two

• Your monthly payments are 110.66. Over a
  9-year-term, your total payments will be

Of this amount, 8,500 pays off the principal.
The rest, of 11,951.28- 8,500
3,451.28 Represents interest payments.
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Choices of Rate and Term

• Because business worry mainly about the bottom
  line, to cater to their customers, they might
  offer different term and rate plans.
• For example you could get a 3-year loan with at
  8, or a 4-year loan at 9 and so.
• The thing you have to consider is that with a
  shorter loan the monthly payment will be higher.
  You need to find out what you can afford.

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Example 3

• You need a 5,000 loan to buy a used car. You
  bank offers a 3-year loan at 8 and a 4-year loan
  at 9.
• Calculate your monthly payments and total
  interest over the loan term with each option.

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3-year Term
36 x 156.685,640.48. 5,000 of this is
your Principal so, 640.48 is interest.
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4-year Term
48 x 124.43 5,972.64, so after the
principal 5,000 is paid off, you paid 972.64 in
interest.
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Credit Cards

• Credit cards are different from installment loans
  because you do not have to pay off your balance
  in any set period of time.
• Instead, they credit card company required you to
  pay only a minimum monthly payment, that pays off
  little of the principal however.

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More on Credit Cards

• With such minimum monthly payments it would take
  you very long to pay off a credit card debt.
• If you wanted to pay off the debt in a set period
  of time you would have to use the loan payment
  formula.

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Credit Card Caution

• Because every business bottom line is to make
  money, a credit card companies interest rates are
  very high, so it is easy to get into debt. If
  you dont pay your monthly payment on time, you
  could wind up in a never ending hole of credit
  card debt!
• Pay your monthly payments on time so that you
  dont have to pay more interest on a higher
  balance because you didnt pay you monthly
  payment on time.

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Example 4

• You have a credit card debt of 3,300 with an
  annual interest rate of 23. You decide to pay
  off your balance over 1 year.
• How much will you need to pay each month? Assume
  you make no further credit card purchases.

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Answer to Example Four
You must pay 310.45 per month to pay off the
balance in one year.
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Example 5

• Vesta Jean has gotten into credit card trouble.
  She has a balance of 10,500 and just lost her
  job. Her credit card company charges interest
  APR 22, compounded daily. Suppose the credit
  card company allows her to suspend her payments
  until she finds a new job-but continues to charge
  interest.
• If it takes her a year to find a new job, how
  much will she owe when she starts her new job?

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Answer to Example Five
13,082.94
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Mortgages

• Today one of the most popular installment loans
  are mortgages, these loans help you buy a house.
• The lender will ask for a down payment, usually
  10 to 20 of the purchase price.
• Then the lender will loan you the rest of the
  money to buy the house.

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More on Mortgages.

• Lenders often have closing costs.
• There are two types of closing cost(1) Direct
  fees, such as fees for getting the home appraised
  and checking you credit history, for which the
  lender charges a fixed dollar amount.(2) Fees
  charged as points where each point is 1 of the
  loan amount. Many lenders divide points into two
  categories an origination fee that is charged
  on all loans and discount points that vary for
  loans with different rates.

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Mortgage Basics

• When you are seeking a home mortgage, be sure to
  keep the following considerations in mind as you
  compare lenders(1) What interest rate and down
  payment are required for the loan?(2) What
  closing costs will be charged? Be sure you
  identify all closing costs, including origination
  fees and discount points, since different lenders
  may quote their fees differently.(3) Watch out
  for fine print, such as prepayment penalties,
  that may make the loan more expensive than it
  seems on the surface.

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Fixed Rate Mortgage

• The simplest type of home loan is a fixed rate
  mortgage, in which you are guaranteed that the
  interest rate will not change over the life of
  the loan.
• Most fixed rate loans have a term of either 15,
  20 or 30 years, with lower interest rates on the
  shorter-term loans.

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Example 6

• You need a loan of 150,000 to buy your new home.
  The bank offers a choice of a 30-year loan at an
  APR of 8 or a 15-year loan at 7.5.
• Compare your monthly payments and total loan
  costs under the two options. Assume that the
  closing costs are the same in both cases and
  therefore do not affect the choice.

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30-year Term
396,234.00
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15-year Term
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Wow, look how much I saved?

• Although it looks as though from first glance
  that the 30-year term saves you more money.
  Looking at the big picture will show that the
  15-year term saves you 145,940.40.

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Example 7

• Great Bank offers a 25 year loan of 150,000 at
  7.5 with closing costs of 700 plus 1 point.
• Big Bank offers a lower rate of 6 for the 25
  year loan at 150,000, but with closing costs of
  1,200 plus 1 point.
• Evaluate the two options.

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Great Bank?
1108.49
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Big Bank?
966.45
Big Banks rates are lower and monthly payments
come out to 966.45, so you save 142.04 a
month with Big Bank, but you must consider
closing cost.
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It is up to You???
Because both banks charge 1 point, it wont
effect your decision.
However, Big Bank has 1,200 in closing fees, and
Great Bank only has 700.
Big Banks charges would be 2,166.45 after
adding the closing fee. Great Banks charges
would be 1,808.49 after closing fees. 357.96
less than Big Bank.
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Homework

• 4C part I
• 2 8, 13, 16 18
• 4C part II
• 23, 27 30, 33, 34, 36, 38