(the nightmare continues…). open-ended installment loans differ from fixed installment loans in a...

(The Nightmare Continues…)

Open-Ended Installment Loans differ from Fixed Installment Loans in a number of ways:◦ They are often referred to as

“revolving credit”◦ These type of loans are usually for

multiple items purchased at different times

◦ The payments are dependent on the purchases made that month and the interest rate at the time of purchase (interest rates may change)

Credit cards are a type of Open-Ended Installment Loan. ◦ The Amount Financed depends upon

the credit limit of the card (often a very high amount compared to actual earnings).

◦ Each month, the consumer is only required to pay a small fraction of their balance (minimum monthly payment).

◦ The term of the loan depends on how quickly the consumer wants to pay off the loan.

Credit cards charge interest using the simple interest formula: I=Prt◦ I is the interest that will be added

on to your balance◦ P is the amount you currently owe

on the loan◦ R is the interest rate (in terms of a

monthly rate; found by dividing the APR by 12)

◦ T is the time of the payment period (usually one month)

This method is the most widely used. The principal is determined by calculating how much you owed on each day of the month, totaling those amounts and dividing by the number of days in that month

◦ Example: If on Jan. 1st you owed $3500, and on Jan 8th you made a payment of $750, the principal on Feb 1st would be ($3500*7 + $2750*23)/30 = $2925

If your card has an APR of 18%, your monthly interest rate is 1.5%. Your minimum monthly payment will be 2% of your total balance.

Using each of the three methods, here is what you would owe:

UB: I = ($2750)(1.5%)(1) = $41.25 + $2750 $2791.25 (2%) = $56 (they round up)

PB: I = ($3500)(1.5%)(1) = $52.50 + $2750$2802.50 (2%) = $57

ADB: I = ($2925)(1.5%)(1) = $43.88 + $2750

$2793.88 (2%) = $56

____ _____ _____ _____ _____

Average Daily Balance is often best calculated using a calendar:◦ Started month owing $3000. Paid $150 on the 8th.

Spent $400 on the 10th, $250 on the 20th, and $100 on the 23rd.

Calculate the ADB for this scenario

3000 3000 3000 3000 3000 3000 3000

2850 2850 3250 3250 3250 3250 3250

3250 3250 3250 3250 3250 3500 3500

3500 3600 3600 3600 3600 3600 3600

Please complete the following:

8.4, p. 436-437; #15-20