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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