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                                                            8
                                                      CHAPTER

                                             Paying for Credit
                                        Answers to the Student Edition
                8-1 ACTIVITY 1 ■ Can You Recall?
              Answer these questions to help you recall what you have read. If you cannot answer a question, read
              the related section again.

               1. List four types of manual (not electronic) ways to make payments on a credit account.
                  Four types of manual (not electronic) ways to make payments on a credit account are cash,
                  personal checks, money orders, and cashier’s checks.
               2. What are the advantages and disadvantages of making payments using cash?
                  An advantage to using cash is that cash is accepted everywhere for payments. The receipt serves
                  as proof of payment and is another advantage to this payment method. A disadvantage to paying
                  with cash is that carrying large amounts of cash can be unsafe. You may be robbed, or you may
                  lose the money. Another disadvantage is that the cash must be delivered in person.
               3. What are the advantages and disadvantages of making payments using a personal check?
                  Paying by check has some advantages. Checks are easy and inexpensive to use. Mailing checks is
                  relatively safe. Cancelled checks or bank statements showing checks that have been processed
                  provide proof of payment. A disadvantage of paying by check is that the check can get lost or
                  delayed in the mail. If the check does not reach the creditor before the due date, you may be
                  charged a late fee.
               4. What is a money order? What are the advantages and disadvantages of making payments using a
                  money order?
                  A money order is a type of check that directs payment of a sum of cash to a payee (a person or
                  company). An advantage to using a money order is that it is prepaid. The payee is guaranteed
                  payment because this type of check cannot bounce. A money order can also be sent safely by
                  mail. A disadvantage to using money orders is that getting one can be inconvenient. At some
                  locations, you may have to stand in line and pay for the money order using cash. At other
                  locations, you may be able to pay by personal check. Another disadvantage is that you must
                  pay a fee for the money order.
               5. How is a cashier’s check different from a certified check? What are the advantages to using these
                  methods of payment?
                  A cashier’s check is drawn on bank funds. A certified check is a personal check for which pay-
                  ment is guaranteed by the bank on which it is drawn. An advantage to using these checks is that
                  they are prepaid. The payee is guaranteed payment.


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          6. What are some advantages of using electronic payments? What are some disadvantages?
             The advantages to electronic payments are that they save postage and, once set up, are quick
             and easy to use. Electronic payments also have disadvantages. You will be charged fees for using
             some types of electronic payment services. You must monitor the balance in your checking
             account carefully to be sure enough funds are available to cover the electronic payments.
             Otherwise, you may have to pay overdraft fees.
          7. What types of activities can customers do using online banking? Give one advantage and one
             disadvantage to making payments using online banking.
             Online banking allows customers to make payments and manage accounts using the bank’s
             Web site. Convenience is the main advantage to online banking. A disadvantage is that banks
             may charge a monthly fee based on the number of payments you make.
          8. What types of information must customers provide to set up online payments at a creditor’s Web site?
             To set up online payments at a creditor’s Web site, customers must provide information such as
             a user name and password, a bank routing number, and a checking account number.
          9. What is a wire transfer? What is its primary advantage?
             A wire transfer is the process of sending money electronically rather than using paper checks.
             An important advantage to using wire transfers is that the transaction is completed very quickly.
             Money is transferred in just minutes, and you are assured that it arrives safely.
         10. What is a prepayment penalty? Why might you still wish to pay off a loan early, even when there
             is a prepayment penalty?
             A prepayment penalty is a fee charged when you repay a loan before the agreed-upon time.
             Repaying a debt early may be a wise choice, even with a prepayment penalty. If the penalty
             amount is less than the interest you would pay if you paid on the original schedule, paying off
             the debt would be to your advantage.


           8-1 ACTIVITY 2 ■ Payment Options
         Assume the following options are available to you for paying bills:
         • Pay in person with cash.
         • Send a personal check by mail.
         • Make an online payment (at the creditor’s Web site).
         • Use the online banking payment system (at your bank’s Web site).
         • Set up a monthly automatic payment from your account.
         • Buy and mail a money order.
         • Secure and mail a cashier’s check.
         • Send a wire transfer.

         What payment method would you choose for each of the following situations and why?
         Answers will vary. Suggested answers follow:

          1. Monthly cell phone bill
             Send a personal check by mail.
             Make an online payment (at the creditor’s Web site).
          2. Monthly electric utility bill
             Set up a monthly automatic payment from your account.


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               3. Monthly credit card bill
                  Send a personal check by mail.
                  Make an online payment (at the creditor’s Web site).
               4. Monthly loan payment to your credit union
                  Send a personal check by mail.
                  Make an online payment (at the creditor’s Web site).
                  Set up a monthly automatic payment from your account.
               5. An online purchase of a book from a merchant with whom you are not familiar
                  Buy and mail a money order.
               6. $100 cash for your brother who is in another town and needs the money right away
                  Send a wire transfer.


                8-2 ACTIVITY 1 ■ Can You Recall?
              Answer these questions to help you recall what you have read. If you cannot answer a question, read
              the related section again.

               1. What is a personal loan? What factors affect the amount of a personal loan for which you may be
                  approved?
                  A personal loan is a loan that you can get based on your general creditworthiness. The following
                  factors affect the amount of the loan for which you may be approved:
                  • The purpose for which the money will be used
                  • Your credit payment history
                  • Your existing debts and current payments to other creditors
                  • Your monthly and yearly income
                  • Your job security (whether you are likely to continue to be employed in your job)
               2. How is a secured loan different from a personal loan? Give two examples of secured loans.
                  A secured loan is different from a personal loan in that some form of collateral is required to secure
                  the loan. If the loan is not repaid, the collateral is repossessed. A car loan and a house loan are
                  two examples of secured loans.
               3. Explain how a fixed rate mortgage differs from an adjustable rate mortgage.
                  With a fixed rate mortgage, the interest rate and payments do not change over the life of the
                  loan. With an adjustable rate mortgage, the interest rate and payments on the loan can change
                  over time. The term of the loan may also increase.
               4. What is a balloon payment? Why might this type of payment be included in a loan agreement?
                  A balloon payment is a large sum that must be paid at a set time. The balloon payment is
                  typically the last loan payment. Balloon payments are often used so the loan will have lower
                  monthly payments.
               5. What types of fees are typically included in loan closing costs?
                  Closing costs include charges for items such as appraisal fees, credit report fees, loan origination
                  fees, recording costs, and inspection fees.
               6. What is the purpose of a mortgage calculator?
                  A mortgage calculator is a tool that can help you quickly calculate loan payments. It can also be
                  used to show how much of each payment made goes toward repaying the principal and how
                  much goes toward paying interest.

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          7. What is the purpose of a student loan? From what sources are student loans available?
             A student loan is debt that is used to finance education costs. Student loans can be secured from
             banks and other financial institutions. Students who meet certain criteria can also get student
             loans from the U.S. government.
          8. Describe how a rent-to-own agreement works. What are the advantages and disadvantages of this
             purchase method?
             With a rent-to-own agreement, the buyer selects an item, takes it home, and uses it just as if it
             had been purchased. Rent payments are made each week or month. At this point, the renter/
             buyer does not own the item. However, the rent-to-own agreement may state that if a certain
             number of payments are made, the buyer will then own the item. There are advantages to this
             type of agreement. You do not have to make a large down payment at the time of purchase.
             If you decide you do not want the item, you can return it and end the rent agreement. The
             contract also provides a guaranteed price. The disadvantages of this option usually outweigh the
             advantages. You may not have much choice in the models or features available for items. If you
             decide not to buy the item, your rent payments are lost. The main disadvantage, however, is that
             the total price you will pay for the item if you make payments until you own it is often much
             higher than if you buy the item outright.


           8-2 ACTIVITY 2 ■ Compare Buying and Leasing Options
         Consumers often do not have enough money to pay the full price of items they want or need to buy. Using
         credit makes buying these items possible. Different forms of credit have different costs. In this activity, you
         will compare paying for an item using a credit card, renting to own an item, and leasing an item.

          1. You have decided you need a laptop computer. The purchase price of the computer is $1,200.
             You can charge this item on your credit card and pay for it over the course of 1 year. The interest
             rate is 18.99 percent. Each month for 11 months, you will pay $110. In the last month, you will
             pay the remainder of the outstanding balance. (For the purposes of this problem, assume there
             will be no other charges or fees on the credit card bill.) The credit card company uses the
             adjusted balance method to compute interest. What is the total amount (purchase price plus
             interest) that you will pay if you use this method to buy the computer?
             The total amount paid will be $1,305.06. This is the purchase price plus interest calculated using
             the adjusted balance method and an annual rate of 18.99 percent. Remind students to use 30 days
             for all months. A sample solution for this problem is provided on the Web site for this textbook
             in the file CH08 8-2 Act 2 Sol.xls.
          2. Another option for buying the computer is to get it from a rent-to-own company. With this type of
             arrangement, you pay fixed monthly rental payments. At this point, you are renting the computer;
             you do not own it. You can stop renting and return the item at any time. If you continue renting
             until you have paid a certain set amount, you will own the computer (and make no more rental
             payments). You must pay a monthly rental fee of $200. You will own the computer after you make
             12 payments. What is the total you will pay for the computer using this option?
             The total you will pay for the computer using this option is $2,400 ($200 monthly rental fee
             12 months).
          3. Another option you can choose is to lease a computer for 1 year. You will be required to make
             monthly payments of $125 for 1 year. At the end of that time, you can return the computer to the
             leasing company, lease it for another year, or lease a newer computer instead. What is the total
             amount that you will pay for 1 year if you choose this option?
             The total amount that you will pay if you choose this option is $1,500 ($125 monthly payment
             12 months).

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               4. Which of the three options—charge to a credit card, rent-to-own, or lease—would you choose?
                  Why would you choose this option?
                  Answers will vary. Students should see that the rent-to-own option is the most expensive way
                  to have use of a computer. The least expensive option is to buy the computer and charge it to
                  the credit card. With this option, the consumer owns the computer. If the consumer needs to
                  upgrade computers every year, however, trying to sell the old computer can be a chore. The
                  lease option is somewhat more expensive, but you can turn in the old computer and get a new
                  one easily. Leasing also has minimal up-front costs.


                8-3 ACTIVITY 1 ■ Can You Recall?
              Answer these questions to help you recall what you have read. If you cannot answer a question, read
              the related section again.

               1. Explain why using credit may tie up future income.
                  Using credit may tie up future income if the debt is paid over several months or years. Part of the
                  income received during those months or years must be used to pay existing debt and is not
                  available for other uses.
               2. Explain how your credit history relates to the interest rate you may have to pay for credit. Why
                  are some people who really need credit unable to get it?
                  If you are considered a low (good) risk, you may also be able to borrow at lower interest rates
                  than someone who is considered a high (bad) risk. Some people may not be able to get credit
                  because they are considered a high credit risk.
               3. Why should you consider the economy when planning credit purchases?
                  During good economic times, interest rates are usually rising. Rather than buying on credit, this
                  could be a good time to save money. When the economy is slowing down, prices may be
                  dropping. This could be a good time to buy because you can get better values.
               4. List the terms typically included in a credit offer.
                  A credit offer typically includes these terms: interest rate being charged, grace period, method of
                  computing interest, annual fee, minimum finance charge, transaction fees, cash advance fees, late
                  fees, and over-the-limit fees. Also, you will find the terms and conditions of the offer.
               5. Why is it important for you to be able to cancel a credit card whenever you wish?
                  Consumers want to be able to cancel cards when the lender raises its rates or changes its terms.
                  The consumer may find another card with better rates or terms.
               6. List three ways you can reduce or avoid credit costs.
                  Students should list three of the following ways to reduce or avoid credit costs:
                  • Pay cash for small purchases instead of using credit.
                  • Keep the number of credit cards and accounts you have to a minimum.
                  • Comparison shop when getting a loan.
                  • Consider financing and special deals arranged by the seller.
                  • Use credit to take advantage of sale prices.
                  • Time your credit purchases to buy right after the closing date of your billing cycle.
                  • Take advantage of cash rebates and rewards.
                  • Use cards that have the best rebate programs for you.
               7. Describe one unethical loan practice.
                  Answers will vary. Students may describe getting loans from loan sharks, advance-fee loan scams,
                  or equity stripping loan practices.

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           8-3 ACTIVITY 2 ■ Research Loan Offers
          1. Find three advertisements of offers for loans. The loans can be personal loans, secured loans, or
             student loans. Newspapers, magazines, and the Internet are places where you may find loan
             offers. You could also ask about loans available at local banks or credit unions.
          2. Find the following information for each loan offer:
             • Type of loan (secured, unsecured, or student loan)
             • Interest rate charged
             • Length of the loan in months or years
             • Application fees, closing costs, and other fees
             • Penalties that may apply, such as a prepayment penalty
             Answers will vary.
          3. Evaluate each offer. Do you think the lender is reputable? Are any of the terms questionable?
             Which offer has the most favorable terms for the borrower?
             Answers will vary.


           Exploring Careers in Health Science
         The purpose of this Exploring Careers page is to help students learn how their interests and talents
         could be used in careers related to health science. Skills needed in the career area and sample job titles
         are given. Students select one job in the career area to explore further using information found online
         in the Occupational Outlook Handbook. Solutions will vary. For the job selected, students should give
         the following information:
         • The nature of the work the job involves
         • The outlook for the job
         • The training or qualifications needed for the job
         • The median annual earnings for the job


           CHAPTER 8 ■ End-of-Chapter Activities

         Activity 1 Review Key Terms
         Use the key terms from Chapter 8 to complete the following sentences:

          1. A type of mortgage loan called a(n) adjustable rate mortgage has an interest rate that can
             change over time, at the discretion of the lender.
          2. A debt instrument called a(n) mortgage is used to secure financing of a house purchase.
          3. A loan for which property has been pledged as collateral called a(n) secured loan .
          4. A large payment, called a(n) balloon payment , is much larger than other loan payments and
             must be paid at a set time, often as the last loan payment.
          5. Personal loans are loans that are based on personal creditworthiness (that have no collateral).
          6. A(n) wire transfer is the process of sending money electronically rather than using paper checks.
          7. The amount of time you have before a credit card company starts charging you interest on your
             new purchases is called the grace period .

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               8. A type of lender that makes a loan for the purchase of consumer goods, such as cars or house-
                  hold appliances, is called a(n) sales finance company .
               9. A personal check for which payment is guaranteed by the bank on which it is drawn is called
                  a(n) certified check .
              10. A service that allows you to make payments and manage your bank account using the bank’s
                  Web site is called online banking .
              11. A(n) money order is a type of prepaid check that directs payment of a sum of cash to the payee.
              12. A fee charged for repaying a loan before the agreed-upon date is called a(n) prepayment penalty .
              13. A(n) student loan is debt used to finance education costs.
              14. Payments that are made by transferring money electronically from a checking account to another
                  account (such as a creditor’s) every billing period are called automatic payments .
              15. Expenses the borrower must pay to get a loan, such as appraisal fees, credit report fees, recording
                  costs, and inspection fees, are known as closing costs .
              16. A(n) cosigner is a person who agrees to repay a loan if the borrower does not repay it.
              17. A type of debt in which you borrow money for a period of time with an agreed-upon interest rate
                  and repayment plan is called a(n) installment loan .
              18. Repaying a debt by making regular payments of principal and interest over a period of time is
                  called amortization .


              Activity 2 Math Minute
               1. The following charges are part of the closing costs for a loan. What is the total amount of the
                  closing costs?
                  Appraisal fee                       $500.00
                  Lender’s inspection fee             $250.00
                  Credit report fee                    $50.00
                  Loan origination fee              $2,500.00 1 percent of the loan amount of $250,000.00
                  Notary public fee                    $60.00
                  Document recording fees              $75.00
                  Title search                        $250.00
                  Survey fee                          $250.00
                  Flood certification                   $30.00
                  Buyer’s attorney fees               $750.00
                  Mortgage insurance                $1,250.00 0.5 percent of the loan amount of $250,000.00
                  Total Closing Costs               $5,965.00
               2. Albert Morrison took out a loan for $90,000.00 at 10 percent interest for 15 years. Albert’s monthly
                  payments are $967.14. Part of each payment is applied to the loan balance, and part is for interest.
                  He has made payments for 2 years (24 payments). He now wants to repay the loan early. The
                  current principal balance owed is $84,257.19. The loan has a $468.00 interest penalty for early
                  repayment. Will Albert save money by repaying the loan (current balance plus penalty) at this time?
                  If so, how much will he save?
                  Albert will save money by repaying the loan now. Albert has made 24 payments of $967.14 for a
                  total of $23,211.36. If he repays the loan now, he will owe $84,257.19 plus the penalty of $468.00
                  for a total of $84,725.19. If he does not pay off the loan now, he will make another 156 payments
                  of $967.14 for a total of $150,873.84. That will be $66,148.65 more than if he pays off the loan now.

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          3. Sue Thomson bought a house for $178,750.00. She is getting a mortgage for $145,000.00. If a
             mortgage is for more than 80 percent of the value of the home, Sue’s lender requires that the
             borrower purchase mortgage insurance. Will Sue have to purchase mortgage insurance?
             Yes, she will be required to purchase mortgage insurance. The amount borrowed ($145,000.00) is
             more than 80 percent of the value of the home ($145,000.00/$178,750.00      0.81    81 percent).

         Activity 3 Mortgage Payments
          1. Open the Excel file CH08 Loan Payment Calculator from the data files. Read the instructions
             provided in the file for using the loan payment calculator. (If you do not have Excel, search for a
             mortgage calculator on the Internet.)
          2. Joe Chin bought a house for $180,000.00. He made a 20 percent down payment. Joe secured a
             loan for the balance of the purchase price at 6.5 percent interest for 30 years. What will the
             monthly payments on the loan be?
             $910.18
          3. Louisa Perez bought a house for $300,000.00. She made a 10 percent down payment. Louisa
             secured a loan for the balance of the purchase price at 5.95 percent interest for 30 years. What will
             the monthly payments on the loan be?
             $1,610.12
          4. Mary Roberts bought a house for $255,000.00. She made a 5 percent down payment. Mary secured
             a loan for the balance of the purchase price at 6.75 percent interest for 15 years. What will the
             monthly payments on the loan be?
             $2,143.69

         Activity 4 Group Presentation
          1. Work with two or three classmates to complete this activity.
          2. Choose a topic related to using credit, and get approval of the topic from your teacher. A few
             suggested topics follow:
             • The housing market in your local area or state
             • The employment market in your local area or state
             • The new and used car markets in your local area or state
             • Interest rates in the economy
             • Loan scams or deceptive practices
             • Making payments online or online banking
             • Comparison of interest rates and other credit terms for different lenders in your area
             Topics selected will vary. Instructors may wish to suggest other topics from which students can
             choose.
          3. As a group, do research on your topic. Use local newspapers, magazines, and the Internet.
          4. As a group, create an outline of the main points you want to include in your presentation to the
             class. Then write down the details you want to cover. Include how the information you found
             could or should affect use of credit by consumers in your area.
             Answers will vary.
          5. Prepare electronic slides, transparencies, posters, handouts, or other visual aids that you can use
             during the speech delivery.
             Visual aids will vary.


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               6. Decide which person will present each part of the speech. Practice as a group. Review the
                  Building Communications Skills: Formal Speaking feature in this chapter to help you prepare.
               7. Deliver the presentation to your class.
                  Presentations will vary. Encourage the class to provide constructive feedback to each group of
                  presenters.

              Activity 5 Reducing Credit Costs
              Enrique is thinking about buying a large, flat-panel television. He will need to borrow money to make
              the purchase. He can arrange the financing ahead of time, or he can use the installment sales plan at
              the store.

               1. What steps can Enrique take to minimize his total costs when choosing the television?
                  Answers will vary. Students should recognize that Enrique should consider both the item being
                  purchased and the cost of the credit. In planning the purchase, Enrique can comparison shop
                  when choosing the television to find the lowest price.
               2. What steps can Enrique take to minimize his total costs when choosing a source of credit?
                  Answers will vary. He should compare credit offers, including line of credit, bank cards, store
                  credit, and special promotional plans (installment sales). He should arrange financing ahead of
                  time so he can compare it with other possible choices at the point of sale.
               3. What steps related to his credit account can Enrique take to minimize his costs following the
                  purchase?
                  Answers will vary. Following the purchase, he should be sure that all payments are made on
                  time and that he pays off the loan as agreed.




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                                                                             NAME


                                                   Answers to Workbook

                                                           CHAPTER
                                                                  8
                                                   Paying for Credit

           EXERCISE 8-1 ■ Review of Chapter Terms
         Directions: Write the letter of the correct definition beside its corresponding term.
           H     1. adjustable rate                A. A type of debt in which you borrow money for a period of time
                    mortgage                           with an agreed-upon interest rate and repayment plan
                                                   B. The amount of time you have before a credit card company starts
           D     2. amortization
                                                       charging you interest on your new purchases
           M     3. automatic                      C. A service that allows you to make payments and manage your
                    payments                           bank account using the bank’s Web site
           E     4. balloon payment                D. Repaying a debt by making regular payments of principal and
                                                       interest over a period of time
           P     5. certified check                 E. A large loan payment that is much higher than the other regular
           J     6. closing costs                      payments and that must be paid at a set time
                                                   F. A debt agreement in which the borrower pledges property of
           L     7. cosigner                           value, called collateral, as security for the loan repayment
           B     8. grace period                   G. Loans that are based on your personal creditworthiness
                                                   H. A mortgage loan with an interest rate that can change over time,
           A     9. installment loan                   at the discretion of the lender
           N    10. money order                     I. The process of sending money electronically rather than using
                                                       paper checks
           K    11. mortgage                        J. Expenses the borrower must pay in order to get a loan, such as
           C    12. online banking                     appraisal fees, credit report fees, recording costs, and inspection
                                                       fees
           G    13. personal loans                 K. A loan used to secure financing for the purchase of a house or
           Q    14. prepayment                         other real estate
                    penalty                        L. A person who agrees to repay a loan if the borrower does not
                                                       repay it
           O    15. sales finance                   M. Payments that are made by transferring money electronically from
                    company                            a checking account to another account every billing period
           F    16. secured loan                   N. A type of prepaid check that directs payment of a sum of cash to
                                                       a payee
           R    17. student loan
                                                   O. A type of lender that makes loans for the purchase of consumer
           I    18. wire transfer                      goods, such as cars or household appliances
                                                   P. A personal check for which payment is guaranteed by the bank
                                                       on which it is drawn
                                                   Q. A fee charged for repaying a loan before the agreed-upon time
                                                   R. Debt used to finance education costs

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                                                                         NAME



                EXERCISE 8-2 ■ Building Communications Skills: Formal Speaking
              Giving a speech in front of an audience can be a very rewarding experience. Learning to speak effec-
              tively is an important skill that will be valuable at school and at work.

              Directions: Prepare a 5-minute speech, and present it to a class or small group of people. Follow
              these steps:

               1. Choose a topic that can be presented in 5 minutes. The purpose of the speech can be to inform,
                  to entertain, or to persuade. Ask your teacher to approve the topic.
                  Topics selected will vary.


               2. Create an outline of the speech. Include an introduction, a body, and a conclusion. Then write
                  detailed notes for what you will say. Consider the audience and what these listeners will know
                  about the topic as you write the speech. Prepare electronic slides, transparencies, posters, hand-
                  outs, or other aids that you can use during the speech delivery.
                  Outlines will vary.


               3. Time the speech so that you can present it in not less than 4 minutes and 50 seconds or more
                  than 5 minutes and 10 seconds.




               4. Practice the speech in front of a group of people.
                  • Dress appropriately.
                  • Maintain eye contact. Use visual aids, if appropriate.
                  • Speak slowly and steadily; keep your voice firm.
                  • Be relaxed and comfortable; smile and use humor if appropriate.
                  Speeches will vary. Evaluate students on their delivery and visuals, as well as on the content of
                  the speech. Time each speech to ensure that the students speak within the allotted time.

               5. Critique your own presentation, and receive feedback from the audience.
                  • What did you do well?
                  • What could be improved?
                  • What would you do differently next time?
                  Answers will vary.


               6. Submit the speech outline and your critique of your delivery of the speech to your teacher.




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                                                                                NAME



           EXERCISE 8-3 ■ Building Math Skills: Annual Percentage Rates
         The annual percentage rate (APR) of a loan takes into account the other loan fees, such as closing costs
         and loan application fees, that a borrower must pay in addition to paying interest on the principal
         borrowed. Comparing the APRs for two different loans can help you see which loan has the highest
         total costs. When comparing the APRs for loan offers, be sure the same fees are covered in the APR
         numbers. APR calculators, available on the Internet, can be used to find the APR for a loan. To find an
         APR calculator, you can enter the term APR calculator into a search engine.

         You can also calculate the approximate APR manually. For example, suppose you buy a sofa with a
         cash price of $800.00. You make a down payment of $100.00 and take out an installment loan of $700.00
         to cover the remainder. You will make 12 payments of $66.00 each. To calculate the approximate APR
         for the loan, follow these steps:

          1. Find the total amount paid using the formula below. Note that the total amount paid includes a
             down payment, if one is made, and all the loan payments.

               Formula            (Number of Payments           Payment Amount)    Down Payment   Total Amount Paid

               Example            (12    $66.00)        $100.00    $892.00


          2. Find the total finance charge using the formula below.

               Formula            Total Amount Paid          Cash Price   Finance Charge

               Example            $892.00        $800.00      $92.00


          3. Find the APR using the formula below. Letters in the formula are explained below.
             n    Number of Payment Periods in One Year
             f   Finance Charge
             P    Principal of Loan
             N    Total Number of Payments to Repay the Loan

                                   2    n    f
               Formula                                 APR
                                  P     (N   1)

                                   2    12       $92.00       2,208
               Example                                                 .2426   24.26%
                                  $700.00        (12    1)    9,100




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                               Paying for Credit
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              Directions: Find the APR for the loans described below. Refer to the formulas and examples given
              above. You can use spreadsheet software or do the math manually. You may wish to access an APR cal-
              culator online and enter the data to check your calculations. The formula finds the approximate APR.
              So the answer you get from an APR calculator may be slightly different. Round your answers to two
              decimal places.

               1. The Smiths are buying a new refrigerator. The cash price is $1,925.00. They will make a down
                  payment of $125.00. The balance will be covered by an installment loan. The loan will be repaid
                  in 24 monthly payments of $88.00. They have been quoted a loan interest rate of 8 percent.
                  What is the annual percentage rate for the loan?
                  (24    $88.00)   $125.00     $2,237.00 total amount paid
                  $2,237.00    $1,925.00    $312.00 finance charge
                    2   12    $312.00       7,488.00
                                                        .1664    16.64% APR
                  $1,800.00    (24    1)   45,000.00




               2. The Chin family is borrowing $5,000.00 to take a vacation to Europe. The personal loan will
                  have payments of $325.00 per month for 18 months. There is no down payment. (Use the loan
                  amount as the cash price in the formula.) What is the annual percentage rate of the loan?
                  18    $325.00    $5,850.00 total amount paid
                  $5,850.00    $5,000.00    $850.00 finance charge
                    2    12   $850.00      20,400.00
                                                       .214736    21.47% APR
                  $5,000.00    (18    1)   95,000.00




               3. Your family is considering buying a utility shed. The shed cash price is $2,410.00. You will make
                  a down payment of 5 percent of the cash price. You will take out an installment loan to cover
                  the remainder. You will make monthly payments of $85.00 for 36 months. What is the annual
                  percentage rate of the loan?
                  $2,410.00    .05   $120.50 down payment
                  (36    $85.00)   $120.50     $3,180.50 total amount paid
                  $3,180.50    $2,410.00    $770.50 finance charge
                    2   12    $770.50      18,492.00
                                                        .218293     21.83% APR
                  $2,289.50    (36    1)   84,711.50




                                                                                            Answers to Workbook 145
44665_08_ch8_p133_148.qxd 1/9/07 18:36 Page 146




                                                                     NAME



           EXERCISE 8-4 ■ Careers in Collections
         A collection agency is a business that collects debts for businesses. Those who work in collections
         (either for a private company or for a collection agency) contact people who are late making their pay-
         ments. They try to work out payment plans and convince the customer to pay the balance that is owed.
         When all efforts fail, they file a collections lawsuit against the customer. The lawsuit usually results in
         a judgment ordering the customer to pay the debt. The judgment can be collected by garnishing wages
         (taking a portion of a person’s earnings). Another collection method is creating an attachment to
         real property. The debt would have to be paid before the property could be sold. Taking personal
         property, such as money from a savings account, is another way the money can be collected. The
         customer may have to pay fees in addition to the debt balance that is owed. These fees can double
         or even triple the debt amount.

         People who work in collections must be able to speak effectively over the telephone. They must also
         write effective letters to convince people to pay what they owe. They must have good negotiation skills.

          1. Learn more about careers related to collections. Access the Occupational Outlook Handbook
             online. A link to the site is provided on the Personal Financial Literacy Web site.




          2. Search the site using the term bill or account collector. Choose a link from the search results
             that will take you to job information.
             Answers will vary. The following answers are from the 2006 –2007 Handbook.


          3. What type of education do most jobs in this occupation require?
             Many jobs in this occupation require only a high school diploma, though many employers prefer
             workers with some postsecondary training.

          4. What is the employment outlook for this type of career?
             Faster-than-average employment growth is expected as companies focus more efforts on collect-
             ing unpaid debts.

          5. What are the median annual wage and salary earnings for bill or account collectors given in the
             Earnings section of this Web page?
             Median hourly earnings of bill and account collectors were $13.20 in May 2004. The middle
             50 percent earned between $10.87 and $16.28. The lowest 10 percent earned less than $9.22,
             and the highest 10 percent earned more than $20.10. In addition to a basic rate of pay, many
             bill and account collectors earn commissions based on the amount of debt they recover.

          6. What do you think would be the most difficult part of a bill or an account collector’s job?
             Students may note that many collections jobs are with credit collection agencies. This type of
             career is often considered stressful.

          7. Does a job as a bill or an account collector appeal to you? Why or why not?
             Answers will vary.




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                               Paying for Credit
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                                                                      NAME



                EXERCISE 8-5 ■ Loan Amortization Table
              Directions: Use the loan amortization table that follows to answer the questions below.
               1. What is the principal of the loan?
                  $25,000.00




               2. What is the loan interest rate?
                  5%




               3. How many monthly payments will be made to repay the loan?
                  36 monthly payments




               4. For payment 1, how much of the payment is for repaying the loan principal? How much is for
                  paying loan interest?
                  $645.11 principal, $104.17 interest




               5. For payment 15, how much of the payment is for repaying the loan principal? How much is
                  for paying loan interest?
                  $683.77 principal, $65.50 interest




               6. For payment 36, how much of the payment is for repaying the loan principal? How much is for
                  paying loan interest?
                  $746.16 principal, $3.11 interest




                                                                                         Answers to Workbook   147
                                                                                                                                              NAME




148
                                                                                          AMORTIZATION TABLE
                    Loan Amount               $25,000.00




Chapter 8
      ●
                    Loan Term                 3 Years
                    Loan Interest Rate        5%
                    Monthly Payments          $749.27

                     Payment No.               1            2            3            4            5            6            7            8            9           10           11           12




Paying for Credit
                     Payment Amount          $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27

                     Principal Paid          $645.11      $647.79      $650.49      $653.20      $655.92      $658.66      $661.40      $664.16      $666.93      $669.70      $672.49      $675.30
                                                                                                                                                                                                       44665_08_ch8_p133_148.qxd 1/9/07 18:36 Page 148




                     Interest Paid           $104.17      $101.48       $98.78       $96.07       $93.35       $90.61       $87.87       $85.11       $82.35       $79.57       $76.78       $73.98

                     Total Interest Paid     $104.17      $205.65      $304.42      $400.49      $493.84      $584.46      $672.33      $757.44      $839.79      $919.36      $996.13     $1,070.11

                     Balance               $24,354.89   $23,707.10   $23,056.61   $22,403.40   $21,747.48   $21,088.82   $20,427.42   $19,763.26   $19,096.34   $18,426.63   $17,754.14   $17,078.84



                     Payment No.              13           14           15           16           17           18           19           20           21           22           23           24

                     Payment Amount          $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27

                     Principal Paid          $678.11      $680.94      $683.77      $686.62      $689.48      $692.36      $695.24      $698.14      $701.05      $703.97      $706.90      $709.85

                     Interest Paid            $71.16       $68.34       $65.50       $62.65       $59.79       $56.92       $54.03       $51.13       $48.23       $45.30       $42.37       $39.43

                     Total Interest Paid    $1,141.27    $1,209.61    $1,275.11    $1,337.76    $1,397.55    $1,454.46    $1,508.49    $1,559.63    $1,607.85    $1,653.16    $1,695.53    $1,734.96

                     Balance               $16,400.73   $15,719.79   $15,036.02   $14,349.40   $13,659.91   $12,967.56   $12,272.32   $11,574.18   $10,873.13   $10,169.16    $9,462.26    $8,752.42



                     Payment No.              25           26           27           28           29           30           31           32           33           34           35           36

                     Payment Amount          $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27      $749.27

                     Principal Paid          $712.80      $715.77      $718.76      $721.75      $724.76      $727.78      $730.81      $733.86      $736.91      $739.98      $743.07      $746.16

                     Interest Paid            $36.47       $33.50       $30.52       $27.52       $24.51       $21.49       $18.46       $15.42       $12.36        $9.29        $6.21         $3.11

                     Total Interest Paid    $1,771.42    $1,804.92    $1,835.44    $1,862.96    $1,887.47    $1,908.97    $1,927.43    $1,942.85    $1,955.20    $1,964.49    $1,970.70    $1,973.81

                     Balance                $8,039.61    $7,323.84    $6,605.08    $5,883.33    $5,158.57    $4,430.79    $3,699.98    $2,966.13    $2,229.21    $1,489.23     $746.16         $0.00

				
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