Chapter 4

Loans and Credit Cards

4.1 Promissory Notes

Interest-Bearing Promissory Notes

• Promissory Note – Your written promise, or IOU, that you will repay the $ to the lender on a certain date.

• Interest – What you pay to use the lender’s $.

• Collateral – Lenders may require a borrower to deposit or pledge property as security for a loan.

• Home equity – The difference between what the home could be sold for and what is owed on it.

• Principal – amount borrowed on a promissory note

• Date of the note – date note is signed

• Due date – Date on which $ must be repaid

P x R x T = I

Principal Rate TimeInterest

A. 2500 x 0.11 x 0.5 (6/12) =

P R T

137.50 + 2500 = 2637.50

B. 3500 x 0.12 x 1.5 (18/12) =

630 + 3500 = 4130

Exact Interest Method

• Note is calculated on number of days

• Exact Interest uses a 365 day year

• Ex: note for 90 days shown as 90/365

C. 5000 x 0.08 x 75/365 =

82.19 + 5000 = 5082.19

D. 3500 x 0.09 x 150/365 =

129.45 + 3500 = 3629.45

Ordinary Interest Method

• Banker’s Interest Method – Uses a 360 day year – 30 days per month

E. 5900 x 0.12 x 180/360 =354 + 5900 = 6254

F. 4000 x 0.09 x 120/360 = 120 + 4000 = 4120

Rate of Interest

Rate of = Interest for 1 Year / Principal

Interest

If interest is given for part of the year have to find interest for full 1 year.

G. 320 x 3 = 960 / 8000 = 0.12 x 100 = 12%

H. 450 x 4 =1800 / 12000 = 0.15 x 100 =15%

4.2 Discounted Promissory Note

Discounted Promissory Notes

• Short-term loans – 30, 60, 90 days

• Interest is collected in advance – Bank Discount

• Since interest is paid in advance it is a noninterest-bearing note.

Principal x Rate of Discount = Bank Discount

Principal – Bank Discount = Proceeds (what you get)

A. 9600 x 0.10 x 0.75(9/12) = 720

9600 – 720 =8880

B. 12800 x 0.13 x 0.25(3/12) = 416

12800 – 416 = 12384

True Rate of Interest

• Interest rate is based on full principal amount – but you don’t receive full principal benefits

True Rate = Interest / Actual Amount Interest Borrowed

C. 25000 – 23250 = 1750 for 6 months need 1 year

1750 x 2 = 3500 / 23250 = 0.151 x 100 = 15.1%

D. 2600 – 2496 = 104 x 3 = 312

312 / 2496 = 0.125 x 100 = 12.5%

4.3 Interest Tables

• Table can be used as a quick reference

Table based on $100 for 365 day year

Steps to find interest:

1. Principal / $100 =

2. Use time and interest rate in table to find multiplier x answer from #1

A. 620 / 100 = 6.2

0.3288 x 6.2 = 2.04

B. 550 / 100 = 5.5

0.7288 x 5.5 = 4.01

C. 1320 / 100 = 13.2

0.5479 + 0.5479 = 1.0958 x 13.2 = 14.46

D. 740 / 100 =7.4

1.0192 + 1.0192 =2.0384 x 7.4 = 15.08

E. 350 / 100 = 3.5

0.6575 + 0.6575 = 1.315 x 3.5 = 4.60

Due Dates

F. March 6 > April 6 > May 6 > June 6

1 m 1 m 1 m

G. March 31 > April 30 > May 31

1 m 1 m

4.4 Installment Loans

Installment Price and Finance Charge

• Down Payment – Reduces the amount of the loan

• Installment Contract

• Installment price is higher than cash price because seller adds a finance charge

A. 12 months x $9 = 108 + 25 = 133

B. 6 months x $26.17 = 157.02 + 20 =177.02

Monthly Installment Payments

• Sometimes need to find the amount of the payment

C.175 – 25 = 150/15 =$10

D. 1044 – 100 = 944/59 =16 months

4.7 Credit Card Costs

• Transactions include purchases, payments and fees• Charges are credits• Previous balance• Late fee• Credit Limit• Over-the-limit fee• Cash advance• Finance charges• APR• New Balance• Minimum Payment Due

A. 3/25

316.15

B. 1.575%

235.13

Verify Transactions

• Compare receipts to statement • Unauthorized purchases

C. 491.23-12.99+12.49-56.29434.44

D. 208.66-48.99-18.79+17.89158.77

Cost of Credit Card Use

• Finance Charges and Fees are big factors

E. 45+29+2.68+7.28+9.22+3.98

97.16

F. 25+29+3.15+16

73.15