Installment Loans

Vocabulary Installment Loan – a loan that is

amortized. This means that both the principal and interest are paid off by a sequence of equal periodic payments. (often used for car loans, etc.)

APR = Annual Percentage Rate (actual rate received by the borrower.)

Nominal Rate = rate that is stated (perhaps in a brochure or advertisement)

To find the total installment cost and the finance charge:

1. Find the total installment cost. = down + payment x number of

payment amount payments

2. Find the finance charge (interest)= Total installment cost – Cash price

3. Find the amount financed (Principal of loan)= Cash price – down payment

Robert Chu purchased a new Toyota Prius costing $24,200, including taxes and licensing, with $4000 down and 48 payments of $488.25 each. Find

(a) the total installment cost, (b) the finance charge, and (c) the amount financed.

Formula for approximate APRApprox APR = 24 x Finance Charge Amt. Financed x (1 + # of payments)

This is ONLY an estimate for the APR!

Bob Drake purchases a two-year old Harley

Davidson motorcycle costing $26,500. He

financed the purchase at his bank with a$5000 down payment and payments of$693.74 for 36 months. Estimate the

APR tothe nearest tenth of a percent.

Find APR using the Table (p 506)1. Multiply the finance charge by 100,

and divide by the amount financed.2. Find # of payments on left column of

table Look to the right until you find the closest value to the # from step 1

3. Look at the top of that column to get the APR.

A refrigerator costing $1450 was financed with $100 down and 20 monthly payments of $74.95 each.

Find (a) the finance charge, (b) amount financed, and (c) the APR.

An insurance agent borrowed $22,500 for new hardware and software for her growing business. She agreed to a note with payments of $858.10 per month for 30 months and put a CD up for collateral instead of making a down payment. Find the APR.