Unit 4: Consumer Credit Part 3: Cost of Credit Dollars & Sense.
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Transcript of Unit 4: Consumer Credit Part 3: Cost of Credit Dollars & Sense.
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Unit 4: Consumer CreditPart 3: Cost of Credit
Dollars & Sense
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Responsibilities of Credit Know the real cost of debt. Don’t use credit to live beyond
your means. It is all about the details…read
the fine print! Pay as much as you can, as early
as you can.
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The Cost of CreditSection 2
The Costs and Methods of Obtaining Credit
When shopping for credit, you should know the finance charges
and annual percentage rates (APR) of the credit sources you
are considering.
annual percentage rate (APRPcost of credit on a yearly basis, expressed as a percentage
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Loan Payments Each of your loan payments are
divided in two parts Principal – Amount of the loan Interest – What the bank charges
for loan you money. Expressed as APR
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Interest
= Principal * Rate * Time
Principal: amount of loan. Rate: interest rate for loan. Time: length of loan.
1 = 1 Year
Maturity Date: the date at which the loan is paid off or comes due.
Rate Sheet
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Simple Interest= Principal * Rate * Time Example: $500, 7% interest, 1 Year
Interest = Interest = $35
Only if you make one payment,Borrow Money January 1st and payback on December 31st
500 * 7%*1
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What If You Made Payments Monthly
Section 2
The Costs and Methods of Obtaining Credit
Annual Percentage Rate Table for Monthly Payments
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Principal Vs. Interest Scenario:
Principal = $117,947.81 Interest Rate = 9% Payment = $1079.67 Due Date = August 1 Loan taken out on July 1
What amount of July’s payment is: Interest Principal
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A. $ X .09 (9%) =$_______Balance of Principal July 1 Int. for
1 year
B. July’s Interest= $_________ / 12 = $_________ int. for 1 year
C. Amt. Applied to Principal$ 1079.67 - $ ___________ = $_____________ Monthly Payment int. for 1 month Amt. to
principal.
D. Balance Left$117,947.81 - $____________ = $_____________Bal. July 1 amt. to principal bal. August
1
117,947.81 10,615.30
884.6110,615.30
884.61 195.06
195.06 117,752.75
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What’s the Balance on September 1st?
A. $ X .09 (9%) =$_______Balance of Principal Aug 1 Int. for
1 year
B. Aug’s Interest= $_________ / 12 = $_________ int. for 1 year
C. Amt. Applied to Principal$ 1079.67 - $ _______ = $_____________ Monthly Payment int. for 1 month Amt. to
principal.
D. Balance Left$117752.75 - $____________ = $_____________Bal. Aug 1 amt. to principal bal. Sept 1
117,752.75 10,597.75
883.1510,597.75
883.15 196.52
196.52 117556.23
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There are easier ways Financial Calculators available
on the Internet Programs have been developed
to create payment schedules. Shows both Principal and Interest
Payment Schedule A Simple MS Excel Spreadsheet
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The Cost of Using CreditSCENARIO: Interest Rate 17% Minimum Payment 2.5% or
$10.00Balance
Time to Pay Off
Interest Charged Total Pay
$1,000.00
12 years $979.00 $1,979.00
$2,500.00
19 years $2,941.00
$5,441.00
$5,000.00
24+ years
$6,210.00
$11,210.00
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The Cost of Using CreditSCENARIO: Interest Rate 24% Minimum Payment: 4% of current
balance or $10
Balance Time to Pay Off
Interest Charged
Total Pay
$2,000.00 9 yrs & 9 mo
$1,774.96 $3774.96,
$6,000.00 14 yrs & 4 mo
$5,775.08 $11,775.08
$10,000.00
16 yrs & 5 mo
$9,774.89 $19,774.89
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Your Task Complete The Loan Activity
Worksheet available on the class website. Use the excel spreadsheet and
financial calculators on the internet to answer the questions.