section 4c loan payments, and credit cards
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4-C. Section 4C Loan Payments, and Credit Cards. Pages 250-264. 4-C. Loan Basics. The principal is the amount of money owed at any particular time. Interest is charged on the loan principal. 4-C. - PowerPoint PPT PresentationTRANSCRIPT
Section 4CSection 4CLoan Payments, and Credit Loan Payments, and Credit
CardsCards
Pages 250-264Pages 250-264
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Loan BasicsLoan Basics
The The principalprincipal is the amount of money is the amount of money owed at any particular time.owed at any particular time.
InterestInterest is charged on the loan principal. is charged on the loan principal.
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Month Month Prior Prior PrincipalPrincipal
InterestInterest.12/12 = .12/12 =
1%1%
Payment Payment toward toward
PrincipalPrincipal
TotalTotal
PaymentPayment
New PrincipalNew Principal
11 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
22 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
33 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
44 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
55 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
66 $1200$1200 $12$12 $0$0 $12$12 $1200$1200
Suppose you borrow Suppose you borrow $1200$1200 at an annual interest rate of at an annual interest rate of APR = 12%APR = 12%Show the balance of the loan if you pay Show the balance of the loan if you pay only the interestonly the interest due for due for 6 months6 months..
BAD IDEABAD IDEA
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Suppose you borrow Suppose you borrow $1200$1200 at an annual interest rate of at an annual interest rate of APR = 12%APR = 12%Show the balance of the loan if you pay Show the balance of the loan if you pay $200 toward principal, plus interest$200 toward principal, plus interest for for 6 months6 months..
Month Month Prior Prior PrincipalPrincipal
InterestInterest.12/12 = .12/12 =
1%1%
Payment Payment toward toward
PrincipalPrincipal
TotalTotal
PaymentPayment
New PrincipalNew Principal
11 $1200$1200 $12$12 $200$200 $212$212 $1000$1000
22 $1000$1000 $10$10 $200$200 $210$210 $800$800
33 $800$800 $8$8 $200$200 $208$208 $600$600
44 $600$600 $6$6 $200$200 $206$206 $400$400
55 $400$400 $4$4 $200$200 $204$204 $200$200
66 $200$200 $2$2 $200$200 $202$202 $0$0
VARYING PAYMENT AMOUNTSVARYING PAYMENT AMOUNTS
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Suppose you borrow Suppose you borrow $1200$1200 at an annual interest rate of at an annual interest rate of APR = 12%APR = 12%Show the balance of the loan if you pay Show the balance of the loan if you pay $200$200 for for 6 months6 months..
Month Month Prior Prior PrincipalPrincipal
InterestInterest1%1%
Payment Payment toward toward
PrincipalPrincipal
TotalTotal
PaymentPayment
New PrincipalNew Principal
11 $1200$1200 $12$12 $188$188 $200$200 $1012$1012
22 $1012$1012 $10.12$10.12 $189.88$189.88 $200$200 $822.12$822.12
33 $822.12$822.12 $8.22$8.22 $191.78$191.78 $200$200 $630.34$630.34
44 $630.34$630.34 $6.30$6.30 $193.70$193.70 $200$200 $436.64$436.64
55 $436.64$436.64 $4.37$4.37 $194.63$194.63 $200$200 $242.01$242.01
66 $242.01$242.01 $2.42$2.42 $197.58$197.58 $200$200 $44.43$44.43
increasingdecreasing
INSTALLMENT LOANINSTALLMENT LOAN
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Loan BasicsLoan Basics
The The principalprincipal is the amount of money is the amount of money owed at any particular time.owed at any particular time.
InterestInterest is charged on the loan principal. is charged on the loan principal.
To pay off a loan, you must gradually pay To pay off a loan, you must gradually pay down the principal. Each payment should down the principal. Each payment should include all the interest plus some amount include all the interest plus some amount that goes toward paying off the principal. that goes toward paying off the principal.
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Suppose you want to pay off a loan with regular Suppose you want to pay off a loan with regular (equal) monthly payments in a certain amount of (equal) monthly payments in a certain amount of time. Use Loan Payment Formula time. Use Loan Payment Formula (pg 252)(pg 252)
APR
PMT = ( )
APR 1 1 +
Pn
n Y
n
P = starting loan principal (amount borrowed)
PMT = equal regular payment
Y = loan term in years
n = number of payment periods per year
APR = annual percentage rate (as a decimal)
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Suppose you borrow Suppose you borrow $1200$1200 at an annual interest rate of at an annual interest rate of APR = 12%APR = 12%How much should you pay each month in order to pay off the loan in How much should you pay each month in order to pay off the loan in 6 months6 months..
APR
PMT = ( )
APR 1 1 +
Pn
n Y
n
.121200
12PMT = ( 12 0.5)
.12 1 1 +
12
CALCULATORCALCULATOR
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( 6)
1 1 + .01
1200 .01PMT =
1 .942045235...12PMT =
.057954765...12PMT =
PMT = $207.06
CALCULATORCALCULATOR
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The Loan Payment Formula (pg 252) can be used forThe Loan Payment Formula (pg 252) can be used for
• student loansstudent loans
• fixed rate mortgagesfixed rate mortgages
• credit card debtcredit card debt
• auto loansauto loans
More Practice . . .More Practice . . .
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A student loan of A student loan of $25,000$25,000 at a fixed APR of at a fixed APR of 10% for 20 years10% for 20 yearsa) Determine the monthly payment.a) Determine the monthly payment.b) Determine the total payment over the term of the loan.b) Determine the total payment over the term of the loan.c) Determine how much of the total payment over the loan termc) Determine how much of the total payment over the loan term goes to principal and how much to interest.goes to principal and how much to interest.
.1025,000
12PMT = ( 12 20)
.10 1 1 +
12
= $241.26
Total Payment: $241.26 Total Payment: $241.26 ×× 12 12 ×× 20 = 20 = $57,902.40$57,902.40
Principal Payment: Principal Payment: $25,000$25,000
Interest Payment: $57,902.40 – $25,000 =Interest Payment: $57,902.40 – $25,000 =
$32,902.40$32,902.40
CALCULATORCALCULATOR
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A home mortgage of A home mortgage of $100,000$100,000 with a fixed with a fixed APR of 8.5%APR of 8.5% for for 30 years30 years. . a) Calculate the monthly payment.a) Calculate the monthly payment.b) Calculate the portions of the payments that go to principal and b) Calculate the portions of the payments that go to principal and to interest during the first 3 months. to interest during the first 3 months. Use a tableUse a table..
.085100000
12PMT = ( 12 30)
.085 1 1 +
12
= $768.91
Month Month Prior Prior PrincipalPrincipal
Total Total
PaymentPayment
InterestInterest0.7083%0.7083%
Payment Payment toward toward
PrincipalPrincipal
New PrincipalNew Principal
11 $100,000$100,000 $768.91$768.91 $708.33$708.33 $60.58$60.58 $99,939.40$99,939.40
22 $99,939.40$99,939.40 $768.91$768.91 $707.90$707.90 $61.01$61.01 $99,878.39$99,878.39
33 $99,878.39$99,878.39 $768.91$768.91 $707.47$707.47 $61.44$61.44 $99,816.95$99,816.95
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Suppose you have a credit card balance of Suppose you have a credit card balance of $2500$2500. The credit card . The credit card APR is 18%APR is 18% and you want to pay it off in and you want to pay it off in 1 year1 year. Determine the monthly. Determine the monthly payment assuming you make no more credit card purchases.payment assuming you make no more credit card purchases.
.182500
12PMT = ( 12 1)
.18 1 1 +
12
= $229.20
Total Payment: $229.20 Total Payment: $229.20 ××12 = 12 = $2750.40$2750.40
Principal Paid: Principal Paid: $2500$2500
Interest Paid: $2750.40 – $2500 =Interest Paid: $2750.40 – $2500 = $250.40 $250.40
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You need to borrow You need to borrow $10,000$10,000 to buy a car and you determine to buy a car and you determine that you can afford monthly payments of that you can afford monthly payments of $220$220. The bank . The bank offers three choices: offers three choices:
a a 3 year loan at 7%,3 year loan at 7%,
a a 4 year loan at 7.5%4 year loan at 7.5% or or
a a 5 year loan at 8%.5 year loan at 8%.
Which option is best for you?Which option is best for you?
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You need to borrow You need to borrow $10,000$10,000 to buy a car and you determine that you can to buy a car and you determine that you canafford monthly payments of afford monthly payments of $220$220. The bank offers three choices: . The bank offers three choices:
a a 3 year loan at 7%,3 year loan at 7%,
= $308.77
$308.77 × 12 × 3 = $11,115.79
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.0710,000
12PMT = ( 12 3)
.07 1 1 +
12
You need to borrow You need to borrow $10,000$10,000 to buy a car and you determine that you can to buy a car and you determine that you canafford monthly payments of afford monthly payments of $220$220. The bank offers three choices: . The bank offers three choices:
a a 4 year loan at 7.5%4 year loan at 7.5% or or
= $241.79
$241.79 × 12 × 4 = $11,605.90
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.07510,000
12PMT = ( 12 4)
.075 1 1 +
12
You need to borrow You need to borrow $10,000$10,000 to buy a car and you determine that you can to buy a car and you determine that you canafford monthly payments of afford monthly payments of $220$220. The bank offers three choices: . The bank offers three choices:
a a 5 year loan at 8%.5 year loan at 8%.
= $202.76
$202.76 × 12 × 5 = $12,165.60
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.0810,000
12PMT = ( 12 5)
.08 1 1 +
12
You need to borrow You need to borrow $10,000$10,000 to buy a car and you determine that you can to buy a car and you determine that you canafford monthly payments of afford monthly payments of $220$220. The bank offers three choices: . The bank offers three choices:
a a 3 year loan at 7%,3 year loan at 7%,
a a 4 year loan at 7.5%4 year loan at 7.5% or or
a a 5 year loan at 8%.5 year loan at 8%.
Which option is best for you?Which option is best for you?
$308.77
$241.79
$202.76
$308.77 × 12 × 3 = $11,115.79
$241.79 × 12 × 4 = $11,605.90
$202.76 × 12 × 5 = $12,165.60
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Home Mortgages may be more complicated:Home Mortgages may be more complicated:
• interest rate (lower)interest rate (lower)
• down paymentdown payment
• closing costsclosing costs
•direct feesdirect fees
• points (each point is 1% of the loan amount)points (each point is 1% of the loan amount)
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You need a loan of You need a loan of $80,000$80,000 to buy a home. In each of the two choices, to buy a home. In each of the two choices,calculate your monthly payments and total closing costs.calculate your monthly payments and total closing costs. Choice 1:Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. Choice 2:Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points. 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.
Choice Choice MonthlyMonthly
PaymentPayment
ClosingClosingCostCost
(direct)(direct)
Closing Closing CostCost
(points)(points)
TotalTotal
ClosingClosing
CostsCosts
TotalTotal
CostsCosts
11 $545.74$545.74
22 $518.88$518.88
.072580,000
12PMT = ( 12 30)
.0725 1 1 +
12
.067580000
12PMT = ( 12 30)
.00675 1 1 +
12
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You need a loan of You need a loan of $80,000$80,000 to buy a home. In each of the two choices, to buy a home. In each of the two choices,calculate your monthly payments and total closing costs.calculate your monthly payments and total closing costs. Choice 1:Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. Choice 2:Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points. 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.
Choice Choice MonthlyMonthly
PaymentPayment
ClosingClosingCostCost
(direct)(direct)
Closing Closing CostCost
(points)(points)
TotalTotal
ClosingClosing
CostsCosts
TotalTotal
CostsCosts
11 $545.74$545.74
22 $518.88$518.88
.072580,000
12PMT = ( 12 30)
.0725 1 1 +
12
.067580000
12PMT = ( 12 30)
.00675 1 1 +
12
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$545.74 12 30 $196,466.4 $518.88 12 30 $186,796.8
You need a loan of You need a loan of $80,000$80,000 to buy a home. In each of the two choices, to buy a home. In each of the two choices,calculate your monthly payments and total closing costs.calculate your monthly payments and total closing costs. Choice 1:Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. Choice 2:Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points. 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.
Choice Choice MonthlyMonthly
PaymentPayment
ClosingClosingCostCost
(direct)(direct)
Closing Closing CostCost
(points)(points)
TotalTotal
ClosingClosing
CostsCosts
TotalTotal
CostsCosts
11 $545.74$545.74 $1200$1200 $800$800
22 $518.88$518.88 $1200$1200 $2400$2400
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$545.74 12 30 $196,466.4 $518.88 12 30 $186,796.8
$80,000 .01 $800 $80,000 .01 3 $2400
You need a loan of You need a loan of $80,000$80,000 to buy a home. In each of the two choices, to buy a home. In each of the two choices,calculate your monthly payments and total closing costs.calculate your monthly payments and total closing costs. Choice 1:Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point. Choice 2:Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points. 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.
Choice Choice MonthlyMonthly
PaymentPayment
ClosingClosingCostCost
(direct)(direct)
Closing Closing CostCost
(points)(points)
TotalTotal
ClosingClosing
CostsCosts
TotalTotal
CostsCosts
11 $545.74$545.74 $1200$1200 $800$800 $2000$2000 196,466 + 2000196,466 + 2000
= $198,466= $198,466
22 $518.88$518.88 $1200$1200 $2400$2400 $3600$3600 186,797 + 3600186,797 + 3600
=$190,397=$190,397
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$545.74 12 30 $196,466.4 $518.88 12 30 $186,796.8
$80,000 .01 $800 $80,000 .01 3 $2400
Homework:Homework:
Pages 265-267Pages 265-267
#16, 28, 30, 40, 44, 46#16, 28, 30, 40, 44, 46
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