8 1 SinglePayment Loans SinglePayment Loan a loan

8. 1 Single-Payment Loans � Single-Payment Loan: a loan that you repay with one payment after a specified period of time. ◦ A promissory note is one type of single-payment loan. ◦ These loans are usually for a short period of time. Generally less than a year. � Maturity Value: the amount you must repay. ◦ It includes the principal of the loan and the interest owed. Term of the loan: the amount of time the loan is granted (may be years, months, or days). � The interest on the loan is calculated one of two ways. � ◦ Ordinary Interest: bases the time of the loan on a 360 -day year. (Assumes that each month has 30 days. ) ◦ Exact Interest: bases the time of the loan on a 365 -day year. � Things to consider/know: ◦ the current interest rate ◦ What is the prime rate and how is it used? � Calculations ◦ Interest = Principal x Rate x Time ◦ Ordinary Interest = Principal x Rate x Time ÷ 360

8. 2 Installment Loans � Installment Loans: a loan that you repay in several equal payments over a specified period of time. ◦ Usually you must make a down payment. ◦ Usually either weekly or monthly payments. ◦ Make a down payment and sign a contract for the rest. (It is important to know what the contract really says. ) ◦ Payments include a finance charge. � Down Payment: a portion of the cash price of the item being purchased. � Amount Financed: the portion of the cash price that is owed after making the down payment. � What are some reasons for borrowing money? Why would someone prefer this type of loan rather than a single-payment loan? � Calculations: ◦ Amount Financed = Cash Price – Down Payment ◦ Down Payment = Amount x Percent

8. 3 Simple Interest Installment Loans � Simple Interest Installment Loan: You pay a finance charge for the use of the money. ◦ Repay the loan with equal monthly payments. ◦ Part of each payment is used to pay the interest on the unpaid balance and the rest of the payment is used to reduce the balance. � Usually repay the amount financed plus the finance charge in equal monthly payments. � Amount of monthly payment depends on the amount financed, the number of payments, and the annual percentage rate. � Annual Percentage Rate (APR): An index showing the relative cost of borrowing money. � Calculations: ◦ Monthly Payment = Amount of Loan x Monthly Payment 100 for a $100 loan ◦ Total Amount Repaid = # of Payments x Monthly Payment ◦ Finance Charge = Total Amount Repaid – Amount

8. 4 Installment Loans – Allocation of Monthly Payment � Recall: The loan is repaid in equal monthly payments. � Part of each payment is used to pay the interest on the unpaid balance of the loan and the remaining part is used to reduce the balance. � Interest is calculated each month using the simple interest formula. � The amount of principal you owe decreases with each payment. � Repayment Schedule: Shows the distribution of interest and principal over the life of the loan. � Why is it important to get a copy of your repayment schedule? � Calculations: ◦ Interest = Principal x Rate x Time ◦ Payment to Principal = Monthly Payment – Interest ◦ New Principal = Previous Principal – Payment to Principal

8. 5 Paying Off Simple Interest Installment Loans With simple interest installment loans, you pay interest on the unpaid balance. If you pay off the loan before the end of the term, your final payment is previous balance plus the current month’s interest. � By paying off the loan before the end of the term you pay less interest. � ◦ Amount of interest saved depends on the total payback minus the sum of the previous payments and the final payment. � Why might a bank not encourage you to pay off a loan early? � Calculations: ◦ Interest = Principal x Rate x Time ◦ Final Payment = Previous Balance + Current Month’s Interest ◦ Interest Saved = Total Payback – (Sum of Previous Payments + Final Payment) ◦ You have a 12 -month loan of $1, 200. 00 at 12% interest with a balance of $816. 04 after the fourth payment. What is the final payment if you pay off the loan with the fifth payment? $816. 04 x 0. 12 x 1/12 = $816. 04 + ◦ If each payment was $106. 56, how much do you save by paying off the loan with the fifth payment? (12 x $106. 56) – [(4 x $106. 56) + $824. 20] = $1, 278. 72 – 1, 250. 24 =

8. 6 Determining the APR � If you know the number of monthly payments and the finance charge per $100 of the amount financed, you can use a table to find the annual percentage rate of the loan. ◦ Use the APR to compare the relative cost of borrowing money. � Calculations: ◦ Use the table on pages 794 -795 to complete these problems. ◦ Finance Charge per $100 = $100 x (Finance Charge ÷ Amount Financed) � A home improvement loan of $4, 000. 00 has payments of $186. 00 per month for 24 months. What is the APR? ◦ Finance Charge = (24 x$186) - $4, 000 = ◦ Finance Charge per $100 = $100 x (464 ÷ 4, 000) = ◦ On the table: Use the row for 24 payments. The closest to $11. 60 is $11. 58. The APR is 10. 75%.