Installment Buying
TERMS
Installment Buying is buying an item using an Installment Loan, which you repay in installments.
Fixed Installment Loan is an installment loan in which you pay a fixed amount for each payment.
We will be dealing with fixed installment loans in this section.
Cash Price is the cost of the product, given in problem.
Down Payment is amount you pay at time of purchase, given in problem.
THINGS YOU WILL CALCULATE
Amount Financed = cash price - down payment (It is the amount that you loan out.)
Total Installment Price = total of all monthly payments + down payment
(It is total amount of money you end up paying)
Finance Charge = total installment price – cash price
(It is the total interest you pay on the loan)
APR (Annual Percentage Rate) is the interest rate that you paid on an installment loan.
Steps to finding an APR:
1. Compute finance charge per $100 financed =
finance charge ÷# of hundreds of dollars of the amount financed
2. Use the chart on p. 443 to find APR:
Follow the row that lists the number of payments to be made, until you get to the box that
is closest in value to step 1. Then the top of that column is the APR.
Example.
The cost of a pick-up truck is $9345. We can finance the truck by paying $300 down and $194.38 per
month for 60 months. Determine the amount financed, total installment price, finance charge and APR.
Amount Financed = cash price – down = 9345 – 300 = 9045
Total Installment Price = all monthly payments + down
= (194.38*60) + 300
= 11662.80 + 300
= 11962.80
Finance charge = total installment price – cash price = 11962.80 – 9345 = 2617.80
APR
1. finance charge per $100 financed = finance chg ÷ #hundreds of dollars of amt financed
= 2617.80 – 90.45
= 28.94
2. Using chart, follow the row for 60 monthly payments until you get to 28.96 (which is the closest
thing to step 1). The top of this column says APR is 10.5%
Warning! There is a problem in your homework which tells you the finance charge per $100 financed,
and asks you to find the APR. For this problem, step 1 of finding APR is already done, and all you have
to do is use the chart.
Another example.
The cost of a computer is $2450. We can finance this by paying $450 down and $95.25 per month for
24 months. Determine the amount financed, total installment price, finance charge and APR.
Amount Financed = cash price – down = 2450 – 450 = 2000
Total Installment Price = all monthly payments + down
= (95.25*24) + 450
= 2736
Finance Charge = Total Installment Price – Cash Price = 2736 – 2450 = 286
APR
1. finance charge per $100 financed = finance chg ÷#hundreds dollars of amt financed
= 286 ÷ 20
= 14.3
2. Using chart, follow the row for 24 monthly payments until you get to 14.10 (which is the closest
thing to step 1). The top of this column says the APR is 13%
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SUMMARY OF EQUATIONS
In English
TOTAL OF ALL MONTHLY PAYMENTS
TOTAL AMOUNT YOU PAY = (INTEREST ON LOAN + AMOUNT OF LOAN) + DOWN PAYMENT
PRICE OF ITEM
Using Math Definitions
(and how to calculate each)
TOTAL OF ALL MONTHLY PAYMENTS
(multiply each monthly payment times number of monthly payments)
TOTAL INSTALLMENT PRICE = (FINANCE CHARGE + AMT FINANCED) + DOWN PAYMENT
(total of all monthly payments minus down) (tot installment price minus cash price) (cash price minus down) (given in problem)
CASH PRICE
(given in problem)