Section 4C Loan Payments, and Credit Cards

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Section 4CLoan Payments, and Credit Cards
Pages 250-264
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Loan Basics
The principal is the amount of money owed at any
particular time.
Interest is charged on the loan principal.
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pg250 Suppose you borrow 1200 at an annual
interest rate of APR 12Show the balance of
the loan if you pay only the interest due for 6
months.
Month Prior Principal Interest1 Payment toward Principal Total Payment New Principal
1 1200 12 0 12 1200
2 1200 12 0 12 1200
3 1200 12 0 12 1200
4 1200 12 0 12 1200
5 1200 12 0 12 1200
6 1200 12 0 12 1200
BAD IDEA
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pg250 Suppose you borrow 1200 at an annual
interest rate of APR 12Show the balance of
the loan if you pay 200 toward principal plus
interest for 6 months.
Month Prior Principal Interest1 Payment toward Principal Total Payment New Principal
1 1200 12 200 212 1000
2 1000 10 200 210 800
3 800 8 200 208 600
4 600 6 200 206 400
5 400 4 200 204 200
6 200 2 200 202 0
VARYING PAYMENT AMOUNTS
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pg250 Suppose you borrow 1200 at an annual
interest rate of APR 12Show the balance of
the loan if you pay 200 for 6 months.
INSTALLMENT LOAN
Month Prior Principal Interest1 Payment toward Principal Total Payment New Principal
1 1200 12 188 200 1012
2 1012 10.12 189.88 200 822.12
3 822.12 8.22 191.78 200 630.34
4 630.34 6.30 193.70 200 436.64
5 436.64 4.37 194.63 200 242.01
6 242.01 2.42 197.58 200 44.43
increasing
decreasing
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Loan Basics
The principal is the amount of money owed at any
particular time.
Interest is charged on the loan principal.
To pay off a loan, you must gradually pay down
the principal. Each payment should include all
the interest plus some amount that goes toward
paying off the principal.
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Suppose you want to pay off a loan with regular
(equal) monthly payments in a certain amount of
time. Use Loan Payment Formula (pg 252)
PMT equal regular payment
P starting loan principal (amount borrowed)
APR annual percentage rate (as a decimal)
n number of payment periods per year
Y loan term in years
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pg250 Suppose you borrow 1200 at an annual
interest rate of APR 12How much should you
pay each month in order to pay off the loan in 6
months.
CALCULATOR
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CALCULATOR
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• The Loan Payment Formula (pg 252) can be used for
• student loans
• fixed rate mortgages
• credit card debt
• auto loans

More Practice . . .
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15/265 A student loan of 25000 at a fixed APR of
10 for 20 years a) Determine the monthly
payment. b) Determine the total payment over the
term of the loan. c) Determine how much of the
total payment over the loan term goes to
principal and how much to interest.
241.26
CALCULATOR
Total Payment 241.26 x 12 x 20 57902.40
Principal Payment 25000 Interest Payment
57902.40 25000 32902.40
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25/265 A home mortgage of 100000 with a fixed APR
of 8.5 for 30 years. a) Calculate the monthly
payment. b) Calculate the portions of the
payments that go to principal and to
interest during the first 3 months. Use a table.
768.91
Month Prior Principal Interest0.7083 Payment toward Principal Total Payment New Principal
1 100000 708.33 60.58 768.91 99939.40
2 99939.40 707.90 61.01 768.91 99878.39
3 99878.39 707.47 61.44 768.91 99816.95
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29/265 Suppose you have a credit card balance of
2500. The credit card APR is 18 and you want
to pay it off in 1 year. Determine the monthly
payment assuming you make no more credit card
purchases.
229.20
Total Payment 229.20 x 12 2750.40
Principal Payment 2500 Interest Payment
2750.40 2500 250.40
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27/265 You need to borrow 10000 to buy a car and
you determine that you can afford monthly
payments of 220. The bank offers three choices
a 3 year loan at 7, a 4 year loan at 7.5
or a 5 year loan at 8.
308.77
308.77 x 12 x 3 11115.79
241.79 x 12 x 4 11605.90
241.79
202.76
202.76 x 12 x 5 12165.60
Which option is best for you?
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• Home Mortgages may be more complicated
• interest rate (lower)
• down payment
• closing costs
• direct fees
• points (each point is 1 of the loan amount)

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43/265 You need a loan of 80000 to buy a home.
In each of the two choices, calculate your
monthly payments and total closing costs.
Choice 1 30 year fixed rate at 7.25 with
closing costs of 1200 and 1 point. Choice
2 30 year fixed rate at 6.75 with closing
costs of 1200 and 3 points.
Choice Monthly Payment ClosingCost (direct) Closing Cost (points) Total Closing Costs Total Costs
1 545.74 1200 800 2000 196466 2000 198466
2 518.88 1200 2400 3600 186797 3600 190397
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Homework Pages 264-268 16, 26, 28, 30, 40, 44