Learning Unit Objectives

1
Installment Buying, Rule of 78, and Revolving
Charge Credit Cards
14

• Learning Unit Objectives
• LU14.1 Cost of Installment Buying
• Calculate the amount financed, finance charge,
  and deferred payment
• Calculate the estimated APR by table lookup
• Calculate the monthly payment by formula and by
  table lookup

2
Installment Buying, Rule of 78, and Revolving
Charge Credit Cards
14

• Learning Unit Objectives
• LU14.2 Paying Off Installment Loan
  before Due Date
• Calculate the rebate and payoff for Rule of 78

3
Installment Buying, Rule of 78, and Revolving
Charge Credit Cards
14

• Learning Unit Objectives
• LU14.3 Revolving Charge Credit Cards
• Calculate the finance charges on revolving charge
  credit card accounts

4
Cost of Installment Buying
Deferred payment price (DPP) - the total of all
monthly payments plusthe down payment. DPP
Total of all Down monthly
payments payment
Amount financed (AF)- the amount actually
borrowed. AF Cash Price - Down Payment
Finance charge (FC) - the interest charge. FC
Total of all - Amount monthly
payments financed
Installment loan - a loan paid of in a series of
equal periodic payments. Payments include
interest and principal.
5
Cost of Installment Buying
Mary Wilson would like to buy a boat that cost
10,000. If she puts down 1,000 she can finance
the balance for 48 months at 11 (monthly payment
232.65). Calculate the amount financed,
finance charge, and deferred payment price.
Amount financed Cash price - Down
payment 9,000 10,000 - 1,000
Finance Charge Total of all - Amount
monthly payments
financed 2,167.20 11,167.20 - 9,000
(232.65 x 48)
Deferred payment Total of all Down
Price monthly
payment payments 12,167.20 11,167.20
1,000
6
Annual Percentage Rate (APR)
Calculating APR rate by table Finance charge x
100 Table 14.1 Amt. financed
lookup
Truth in Lending Act APR must be accurate
to the nearest 1/4 of 1
2,167.20 x 100 24.08 9,000 Between 11.00
- 11.25
7
Table 14.1 - Annual Percentage Rate Table per 100
8
Calculating the Monthly Payment by Formula
Finance charge Amount financed Number of
payments of loan
2,167.20 9,000 48 232.65
9
Calculating the Monthly Payment by Table
Step 3. Multiply the quotient in Step 1 by the
factor in Step 2 9 x 25.85 232.65
Step 2. Look up the rate (11) and the number of
months (48). At the intersection is the table
factor showing the monthly payment per 1,000
(25.85)

Step 1. Divide the loan amount by 1,000 9,000
9 1,000
10
Table 14.2 - Loan Amortization Table(Monthly
payment per 1,000 to pay principal and interest
on installment loan) (Partial)
11
Calculating Rebate and Payoff for Rule of 78
Rule of 78 - A variation of the U. S. Rule. The
Rule of 78 is not allowed for loans of 61 months
or longer
Step 6. Calculate the payoff
Step 5. Calculate the rebate amount of the
finance charge
Step 4. Set up the rebate fraction from Table
14.3
Step 3. Find the number of payments remaining
Step 2. Calculate the total finance charge

Step 1. Find the balance of the loan outstanding
12
Table 14.3 - Rebate Fraction Table based on Rule
of 78
13
Paying Off Installment Loan before Due Date
What is the rebate of the finance charge and
payoff if the boat loan were paid off after 30
months?
1. 48 x 232.65 11,167.20 - 30 x 232.65
6,979.50 Bal. Out. 4,187.70
4. 171 - Sum of digits 18 mnths 1,176 - Sum
of digits 48 mnths
5. 171 x 2,167.20 315.13 1,176
2. 11,167.20 - 9,000.00 2,167.20
Total fin. chr.
6. 4,187.70 -315.13 3,872.57
3. 48 -30 18 - Pymts. remaining
14
Revolving Charge Credit Cards
Interest charges are based on the interest rate
times the previous months balance (outstanding
balance)
Fair Credit and Charge Card Disclosure Act of
1988.
Revolving charge account - allows the buyer
open-end credit up to the maximum credit limit.
Payments are first applied towards interest and
then the outstanding balance (US Rule)
15
Table 14.4 - Schedule of Payments
Monthly Outstanding Amount of
payment balance 1 1/2 interest monthly
Reduction in Outstanding number due
payment payment balance due balance due 1
8,000.00 120.00 500
380.00 7,620.00 (.015 x 8,000)
(500 - 120) (8,000 - 380) 2
7,620.00 114.30 500 385.70
7,234.30 (.015 x 7,620) (500 -
114.30) (7,620 - 385.70) 3 7,234.30
108.51 500 391.49
6,842.81 (.015 x 7,234.30)
(500 - 108.51) (7,234.30-391.49)
16
Calculating Average Daily Balance
Step 4. Divide the sum of the cumulative daily
balances by the number of days in the billing
cycle.
Step 3. Add the cumulative balances.
Step 2. When the daily balance is the same for
more than one day, multiply it by the number of
days the daily balance remained the same or the
number of days of the current balances.
Step 1. Calculate the daily balance or amount
owed at the end of each day during the billing
cycle Daily Previous Cash
Purchases - Payments balance balance
advances
17
Calculating Average Daily Balance
30 - day billing cycle 6/20 Billing date Previous
balance 450 6/27 Payment 50cr. 6/30 Charge
JCPenney 200 7/9 Payment 40cr. 7/12 Cash
advance 60
Days Current daily bal. Extension 7 450 3,150
3 400 (450- 50) 1,200 9 600 (400200)
5,400 3 560 (600 - 40) 1,680 8 620 (560
60) 4,960 30 16,390 Average daily
balance 16,390 546.33 30
Step 1
Step 2
Step 3
30-22
Step 4