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Section 4C Section 4C Loan Payments, and Loan Payments, and Credit Cards Credit Cards Pages 250-264 Pages 250-264 4-C 4-C

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 Presentation

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Page 1: Section 4C Loan Payments, and Credit Cards

Section 4CSection 4CLoan Payments, and Credit Loan Payments, and Credit

CardsCards

Pages 250-264Pages 250-264

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Page 2: Section 4C Loan Payments, and Credit Cards

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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Page 3: Section 4C Loan Payments, and Credit Cards

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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Page 4: Section 4C Loan Payments, and Credit Cards

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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Page 5: Section 4C Loan Payments, and Credit Cards

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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Page 6: Section 4C Loan Payments, and Credit Cards

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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Page 7: Section 4C Loan Payments, and Credit Cards

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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Page 8: Section 4C Loan Payments, and Credit Cards

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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Page 9: Section 4C Loan Payments, and Credit Cards

( 6)

1 1 + .01

1200 .01PMT =

1 .942045235...12PMT =

.057954765...12PMT =

PMT = $207.06

CALCULATORCALCULATOR

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Page 10: Section 4C Loan Payments, and Credit Cards

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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Page 11: Section 4C Loan Payments, and Credit Cards

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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Page 12: Section 4C Loan Payments, and Credit Cards

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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Page 13: Section 4C Loan Payments, and Credit Cards

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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Page 14: Section 4C Loan Payments, and Credit Cards

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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Page 15: Section 4C Loan Payments, and Credit Cards

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

Page 16: Section 4C Loan Payments, and Credit Cards

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

Page 17: Section 4C Loan Payments, and Credit Cards

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

Page 18: Section 4C Loan Payments, and Credit Cards

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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Page 19: Section 4C Loan Payments, and Credit Cards

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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Page 20: Section 4C Loan Payments, and Credit Cards

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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Page 21: Section 4C Loan Payments, and Credit Cards

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

Page 22: Section 4C Loan Payments, and Credit Cards

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

Page 23: Section 4C Loan Payments, and Credit Cards

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

Page 24: Section 4C Loan Payments, and Credit Cards

Homework:Homework:

Pages 265-267Pages 265-267

#16, 28, 30, 40, 44, 46#16, 28, 30, 40, 44, 46

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