![Page 1: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/1.jpg)
Introduction to Business
Ch 26: The Cost of Credit
![Page 2: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/2.jpg)
Interest Calculations
• Interest Rate – The % that is applied to your debt expressed as a fraction or decimal
• Principal – The amount of the debt to which the interest rate is applied
• Time Factor – The length of time for which interest will be charged
![Page 3: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/3.jpg)
Interest Calculations
• P * R * T = Interest
• Time – Months – X/12• Days – X/360• Year – X
![Page 4: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/4.jpg)
Interest Calculations
• P * R * T = Interest
• Borrow $1000 at 9% for 1 yearI = 1000 * .09 * 1
= $90
![Page 5: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/5.jpg)
Interest Calculations
• P * R * T = Interest
• Borrow $100 at 12% for 2 yearsI = 100 * 12/100 or .12 * 2= 12 * 2= $24Owe back $124
![Page 6: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/6.jpg)
Interest Calculations
• P * R * T = Interest
• Borrow $500 at 20% for 60 daysI = 500 * 20/100 or .2 * 60/360= 100 * 1/6= $16.67Owe back $516.67
![Page 7: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/7.jpg)
Interest Calculations
• P * R * T = Interest
• Borrow $1000 at 10% for 4 monthI = 1000 * 10/100 or .1 * 4/12= 100 * 1/3= 33.34Owe back $1033.34
![Page 8: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/8.jpg)
Maturity Date• Maturity Date – Date on which a loan must be
repaid – Examples: Today October 17, 2012• MD is one year – Due Date is October 17, 2013• MD is 6 months – Due Date is April 17, 2013• MD is 180 days – Due Date is ?
– 180 – (31-17) = 166» Nov -30 = 136» Dec -31 = 105» Jan -31 = 74» Feb -28 = 46» March -31 = 15» Due Date is April 15
![Page 9: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/9.jpg)
Installment Interest
• Installment Loan – repay loan in partial payments
• Installment – Each payment• Borrower is given a schedule of payments or a
payment book that show how much is to be paid each month
![Page 10: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/10.jpg)
Installment Interest
• Example: Borrow $100 at 10% for 1 yearInterest = 100 * .1 *1
= $10Owe back $110Installment = 110 / 12
= $9.16Our last payment will include the additional 8 cents
![Page 11: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/11.jpg)
• Buy a new Car– Borrow $30,000 at 4% for 5 years• Interest = 30000 * .04 * 5
= 1200 * 5= 6000Owe back 36000 in 5 yearsInstallments = 36000/60
= $600
![Page 12: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/12.jpg)
Finance Charges
• Annual Percentage Rate (APR)– States the percentage cost of credit on a yearly
basis– Required by law to be disclosed
• Service Fees – involve the time and money it takes to investigate your credit history, process your loan, keep record of your payments
![Page 13: Introduction to Business Ch 26: The Cost of Credit](https://reader035.vdocuments.us/reader035/viewer/2022072114/56649eba5503460f94bc24fa/html5/thumbnails/13.jpg)
Finance Charges
• Credit Insurance – Special insurance that repays the balance of the amount owed if the borrower dies or becomes disabled prior to full settlement of the loan