$1200 Bad Credit Loan by oxu14624

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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

Suppose you borrow $1200 at an annual interest rate of APR = 12%
Show the balance of the loan if you pay only the interest due for 6 months.

Month       Prior      Interest   Payment       Total       New Principal
          Principal    .12/12 =    toward      Payment
                         1%       Principal
  1         $1200           $12           $0         $12              $1200

  2         $1200           $12           $0         $12              $1200

  3         $1200           $12           $0         $12              $1200

  4         $1200           $12           $0         $12              $1200

  5         $1200           $12           $0         $12              $1200

  6         $1200           $12           $0         $12              $1200


                               BAD IDEA
                                                                         4-C

Suppose you borrow $1200 at an annual interest rate of APR = 12%
Show the balance of the loan if you pay $200 toward principal, plus interest
for 6 months.

Month       Prior       Interest   Payment      Total      New Principal
          Principal     .12/12 =    toward     Payment
                          1%       Principal
  1         $1200         $12        $200       $212            $1000

  2         $1000         $10        $200       $210            $800

  3         $800          $8         $200       $208            $600

  4         $600          $6         $200       $206            $400

  5         $400          $4         $200       $204            $200

  6         $200          $2         $200       $202             $0

                      VARYING PAYMENT AMOUNTS
                                                                       4-C

Suppose you borrow $1200 at an annual interest rate of APR = 12%
Show the balance of the loan if you pay $200 for 6 months.
                                    INSTALLMENT LOAN

Month      Prior        Interest   Payment       Total    New Principal
         Principal        1%        toward      Payment
                                   Principal
  1        $1200          $12        $188        $200        $1012

  2        $1012        $10.12     $189.88       $200        $822.12

  3       $822.12        $8.22     $191.78       $200        $630.34

  4       $630.34        $6.30     $193.70       $200        $436.64

  5       $436.64        $4.37     $194.63       $200        $242.01

  6       $242.01        $2.42     $197.58       $200        $44.43

                     decreasing    increasing
                                             4-C




Loan Basics
The principal is the amount of money
owed at any particular time.

Interest is charged on the loan principal.


To pay off a loan, you must gradually pay
down the principal. Each payment should
include all the interest plus some amount
that goes toward paying off the principal.
                                                      4-C

Suppose you want to pay off a loan with regular
(equal) monthly payments in a certain amount of
time. Use Loan Payment Formula (pg 252)
                            APR 
                              
                        P    
                              
                                  

             PMT =           n 
                              
                              
                                  
                                  
                                 (nY )
                          APR 
                   1 
                      1 +     
                      
                           n 
                               

   PMT = equal regular payment
      P = starting loan principal (amount borrowed)
   APR = annual percentage rate (as a decimal)
      n = number of payment periods per year
     Y = loan term in years
                                                                         4-C

Suppose you borrow $1200 at an annual interest rate of APR = 12%
How much should you pay each month in order to pay off the loan in 6 months.

                        APR 
                    P       
                             
                              

        PMT =            n  
                             
                              
                              
                             (nY )
                      APR 
              1  1 +
                  
                           
                  
                       n 
                           


                                   .12 
                                     
                        1200        
                                     
                                       

               PMT =                12 
                                     
                                     
                                       
                                       
                                   (12 0.5)
                            .12 
                     1 
                        1 +     
                        
                            12 
                                 




                            CALCULATOR
                                                    4-C


                    1200  .01
         PMT =        1  1 + .01
                                       ( 6 )
                                                
                      
                                               
                                                
CALCULATOR

        PMT =             12
                1  .942045235...
                                 


        PMT =        12
                .057954765...
                             


       PMT = $207.06
                                                    4-C




The Loan Payment Formula (pg 252) can be used for
• student loans
• fixed rate mortgages
• credit card debt
• auto loans

               More Practice . . .
                                                                        4-C

A student loan of $25,000 at a fixed APR of 10% for 20 years
        a) Determine the monthly payment.
        b) Determine the total payment over the term of the loan.
        c) Determine how much of the total payment over the loan term
           goes to principal and how much to interest.

                              .10 
                              
                 25,000      
                              
                                  

        PMT =                 12 
                              
                              
                                  
                                  
                             (12 20)              = $241.26
                      .10 
              1  1 +
                  
                           
                                            CALCULATOR
                  
                      12 
                           



         Total Payment: $241.26 × 12 × 20 = $57,902.40

        Principal Payment: $25,000
        Interest Payment: $57,902.40 – $25,000 =
         $32,902.40
                                                                              4-C

A home mortgage of $100,000 with a fixed APR of 8.5% for 30 years.
       a) Calculate the monthly payment.
       b) Calculate the portions of the payments that go to principal and
          to interest during the first 3 months. Use a table.
                                 .085 
                                   
                    100000        
                                   
                                      

            PMT =                 12 
                                   
                                   
                                      
                                      
                                 (1230)           = $768.91
                         .085 
                  1 
                     1 +      
                     
                          12 
                               

 Month        Prior      Total         Interest   Payment     New Principal
            Principal   Payment        0.7083%     toward
                                                  Principal
    1       $100,000     $768.91       $708.33     $60.58       $99,939.40

    2      $99,939.40    $768.91       $707.90     $61.01       $99,878.39

    3      $99,878.39    $768.91       $707.47     $61.44       $99,816.95
                                                                         4-C

Suppose you have a credit card balance of $2500. The credit card
APR is 18% and you want to pay it off in 1 year. Determine the monthly
payment assuming you make no more credit card purchases.


                            .18 
                              
                  2500       
                              
                                 

         PMT =               12 
                              
                              
                                 
                                 
                              (121)             = $229.20
                           
                        .18 
               1  1 +
                   
                   
                       12 
                            




        Total Payment: $229.20 ×12 = $2750.40

       Principal Paid: $2500
       Interest Paid: $2750.40 – $2500 = $250.40
                                                            4-C

You need to borrow $10,000 to buy a car and you determine
that you can afford monthly payments of $220. The bank
offers three choices:


a 3 year loan at 7%,

a 4 year loan at 7.5% or

a 5 year loan at 8%.

          Which option is best for you?
                                                                         4-C

You need to borrow $10,000 to buy a car and you determine that you can
afford monthly payments of $220. The bank offers three choices:


a 3 year loan at 7%,

                      .07 
                       
          10,000      
                       
                          

  PMT =                12 
                       
                       
                          
                                               = $308.77
                      (123)
               .07 
        1 
           1 +     
           
               12 
                    




            $308.77 × 12 × 3 = $11,115.79
                                                                         4-C

You need to borrow $10,000 to buy a car and you determine that you can
afford monthly payments of $220. The bank offers three choices:


a 4 year loan at 7.5% or

                    .075 
                      
         10,000      
                      
                         

 PMT =                12 
                      
                      
                         
                         
                      (12 4)             = $241.79
              .075 
       1 
          1 +      
          
               12 
                    




                          $241.79 × 12 × 4 = $11,605.90
                                                                         4-C

You need to borrow $10,000 to buy a car and you determine that you can
afford monthly payments of $220. The bank offers three choices:



a 5 year loan at 8%.
                        .08 
                        
            10,000     
                        
                            

   PMT =
                        
                        12 
                            
                                              = $202.76
                        (125)
                 .08 
         1  1 +
             
                      
             
                 12 
                      




                      $202.76 × 12 × 5 = $12,165.60
                                                                           4-C

You need to borrow $10,000 to buy a car and you determine that you can
afford monthly payments of $220. The bank offers three choices:


a 3 year loan at 7%,         $308.77       $308.77 × 12 × 3 = $11,115.79



a 4 year loan at 7.5% or     $241.79       $241.79 × 12 × 4 = $11,605.90



a 5 year loan at 8%.         $202.76        $202.76 × 12 × 5 = $12,165.60



                       Which option is best for you?
                                                    4-C




Home Mortgages may be more complicated:
• interest rate (lower)
• down payment
• closing costs
   •direct fees
   • points (each point is 1% of the loan amount)
                                                                                      4-C

You need a loan of $80,000 to buy a home. In each of the two choices,
calculate your monthly payments and total closing costs.
   Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point.
   Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.

Choice      Monthly              Closing    Closing      Total               Total
            Payment               Cost        Cost      Closing              Costs
                                 (direct)   (points)     Costs
   1         $545.74

   2         $518.88



                                                                       .0675 
                                                                         
                             
                           .0725                              80000        
                  80,000    
                             
                                     
                                                                        12 
                                                                         
                                                                         
                                                                         
                                                                              
                                                                              
                             12                  PMT =
       PMT =                        
                              (1230)                                     (1230)
                                                                .00675 
                      .0725                             1  1 +        
             1  1 +       
                                                             
                 
                 
                       12 
                            
                                                             
                                                                   12  
                                                                         
                                                                                      4-C

You need a loan of $80,000 to buy a home. In each of the two choices,
calculate your monthly payments and total closing costs.
   Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point.
   Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.

Choice      Monthly              Closing    Closing        Total              Total
            Payment               Cost        Cost        Closing             Costs
                                 (direct)   (points)       Costs
   1         $545.74

   2         $518.88



                                                                       .0675 
                                                                          
                             
                           .0725                               80000       
                  80,000    
                             
                                     
                                                                        12 
                                                                          
                                                                          
                                                                          
                                                                              
                                                                              
                             12                  PMT =
       PMT =                        
                              (1230)                                     (1230)
                                                                .00675 
                      .0725                             1  1 +        
             1  1 +       
                                                             
                 
                 
                       12 
                            
                                                             
                                                                   12  
                                                                         


$545.74 12  30  $196,466.4
                                                       $518.88 12  30  $186,796.8
                                                                              4-C

You need a loan of $80,000 to buy a home. In each of the two choices,
calculate your monthly payments and total closing costs.
   Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point.
   Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.

Choice     Monthly      Closing     Closing       Total          Total
           Payment       Cost         Cost       Closing         Costs
                        (direct)    (points)      Costs
   1        $545.74      $1200       $800

   2        $518.88      $1200       $2400




 $545.74 12  30  $196,466.4                 $518.88 12  30  $186,796.8

 $80,000  .01  $800                     $80,000  .01 3  $2400
                                                                              4-C

You need a loan of $80,000 to buy a home. In each of the two choices,
calculate your monthly payments and total closing costs.
   Choice 1: 30 year fixed rate at 7.25% with closing costs of $1200 and 1 point.
   Choice 2: 30 year fixed rate at 6.75% with closing costs of $1200 and 3 points.

Choice     Monthly      Closing     Closing       Total          Total
           Payment       Cost         Cost       Closing         Costs
                        (direct)    (points)      Costs
   1        $545.74      $1200       $800         $2000     196,466 + 2000
                                                              = $198,466
   2        $518.88      $1200       $2400        $3600     186,797 + 3600
                                                              =$190,397


 $545.74 12  30  $196,466.4                 $518.88 12  30  $186,796.8

 $80,000  .01  $800                     $80,000  .01 3  $2400
                                 4-C




Homework:
   Pages 265-267
       #16, 28, 30, 40, 44, 46

								
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