Unit 4: Consumer CreditPart 3: Cost of Credit

Dollars & Sense

Responsibilities of Credit Know the real cost of debt. Don’t use credit to live beyond

your means. It is all about the details…read

the fine print! Pay as much as you can, as early

as you can.

The Cost of CreditSection 2

The Costs and Methods of Obtaining Credit

When shopping for credit, you should know the finance charges

and annual percentage rates (APR) of the credit sources you

are considering.

annual percentage rate (APRPcost of credit on a yearly basis, expressed as a percentage

Loan Payments Each of your loan payments are

divided in two parts Principal – Amount of the loan Interest – What the bank charges

for loan you money. Expressed as APR

Interest

= Principal * Rate * Time

Principal: amount of loan. Rate: interest rate for loan. Time: length of loan.

1 = 1 Year

Maturity Date: the date at which the loan is paid off or comes due.

Rate Sheet

Simple Interest= Principal * Rate * Time Example: $500, 7% interest, 1 Year

Interest = Interest = $35

Only if you make one payment,Borrow Money January 1st and payback on December 31st

500 * 7%*1

What If You Made Payments Monthly

Section 2

The Costs and Methods of Obtaining Credit

Annual Percentage Rate Table for Monthly Payments

Principal Vs. Interest Scenario:

Principal = $117,947.81 Interest Rate = 9% Payment = $1079.67 Due Date = August 1 Loan taken out on July 1

What amount of July’s payment is: Interest Principal

A. $ X .09 (9%) =$_______Balance of Principal July 1 Int. for

1 year

B. July’s Interest= $_________ / 12 = $_________ int. for 1 year

C. Amt. Applied to Principal$ 1079.67 - $ ___________ = $_____________ Monthly Payment int. for 1 month Amt. to

principal.

D. Balance Left$117,947.81 - $____________ = $_____________Bal. July 1 amt. to principal bal. August

1

117,947.81 10,615.30

884.6110,615.30

884.61 195.06

195.06 117,752.75

What’s the Balance on September 1st?

A. $ X .09 (9%) =$_______Balance of Principal Aug 1 Int. for

1 year

B. Aug’s Interest= $_________ / 12 = $_________ int. for 1 year

C. Amt. Applied to Principal$ 1079.67 - $ _______ = $_____________ Monthly Payment int. for 1 month Amt. to

principal.

D. Balance Left$117752.75 - $____________ = $_____________Bal. Aug 1 amt. to principal bal. Sept 1

117,752.75 10,597.75

883.1510,597.75

883.15 196.52

196.52 117556.23

There are easier ways Financial Calculators available

on the Internet Programs have been developed

to create payment schedules. Shows both Principal and Interest

Payment Schedule A Simple MS Excel Spreadsheet

The Cost of Using CreditSCENARIO: Interest Rate 17% Minimum Payment 2.5% or

$10.00Balance

Time to Pay Off

Interest Charged Total Pay

$1,000.00

12 years $979.00 $1,979.00

$2,500.00

19 years $2,941.00

$5,441.00

$5,000.00

24+ years

$6,210.00

$11,210.00

The Cost of Using CreditSCENARIO: Interest Rate 24% Minimum Payment: 4% of current

balance or $10

Balance Time to Pay Off

Interest Charged

Total Pay

$2,000.00 9 yrs & 9 mo

$1,774.96 $3774.96,

$6,000.00 14 yrs & 4 mo

$5,775.08 $11,775.08

$10,000.00

16 yrs & 5 mo

$9,774.89 $19,774.89

Your Task Complete The Loan Activity

Worksheet available on the class website. Use the excel spreadsheet and

financial calculators on the internet to answer the questions.