introduction to business ch 26: the cost of credit

Introduction to Business

Ch 26: The Cost of Credit

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


• P * R * T = Interest

• Time – Months – X/12• Days – X/360• Year – X



• Borrow $1000 at 9% for 1 yearI = 1000 * .09 * 1

= $90



• Borrow $100 at 12% for 2 yearsI = 100 * 12/100 or .12 * 2= 12 * 2= $24Owe back $124



• Borrow $500 at 20% for 60 daysI = 500 * 20/100 or .2 * 60/360= 100 * 1/6= $16.67Owe back $516.67



• Borrow $1000 at 10% for 4 monthI = 1000 * 10/100 or .1 * 4/12= 100 * 1/3= 33.34Owe back $1033.34

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

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

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

• 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

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

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

introduction to business ch 26: the cost of credit

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