Business Math Ch 14: Cost of Installment Buying

The APR table is based on __________ of financing.

$100

Day 1: Previous balance is $1,000. Day 2: Purchase of $20. Day 3: Cash advance of $50. Day 4: Payment of $110. Day 5: Purchase of $35. Find the finance charge with a 12% annual rate (use the monthly rate). A) $5,045 B) $10.09 C) $121.08 D) $1,009

The finance charge is found by multiplying the average daily balance by the monthly interest rate. $1,000 + $20 = $1,020. $1,020 + $50 = $1,070. $1,070 - $110 = $960. $960 + $35 = $995. $1,000 + $1,020 + $1,070 + $960 + $995 = $5,045 ÷ 5 = $1,009 × 1% = $10.09.

An act requiring direct mail credit card solicitations to include information on all fees, charges and grace periods. A) Fair Credit and Charge Card Disclosure Act B) The Rule of 78 C) Truth in Lending Act

Fair Credit and Charge Card Disclosure Act

True or false: Revolving charge accounts give consumers closed-ended credit.

False

True or false: Revolving credit cards are an unpopular form of spending due to the inconvenience involved.

False

Nicolas signed an installment agreement to borrow $1,000 for 3 years to be paid back monthly. The cost of the loan is $195.56. What is the APR? A) 19.57% B) 12% C) 14.25%

Finance Charge ÷ amount financed $195.56 ÷ $1,000 19.56. Use the table factor of 19.56 at 36 periods. This corresponds to 12% APR.

The Truth in Lending Act requires creditors to inform customers of the ____________________ _____________________ and the annual percentage rate (APR).

Finance charge

Pullman Transport purchased equipment on installment with a cash price of $11,000 paying $1,000 down and agreeing to pay $869.90 per month for one year. What is the total of all monthly payments? A) $438.80 B) $869.90 C) $10,438.80 D) $11,438.80

$869.90 × 12 = $10,438.80.

Alexander was charged $2,390 to borrow $10,000. This is to be paid back monthly over 5 years. What is his monthly payment? A) $166.67 B) $126.83 C) $2,478 D) $206.50

($2,390 + $10,000)/(12 x 5) D) $206.50

Alyse was charged $3,657 to borrow $14,000. What is the table lookup factor for finding the APR? A) 26.12 B) 0.2612 C) 0.0026

(3,657/14,000) X 100 A) 26.12 The table factor is found by dividing the finance charge by the amount financed and multiplying by $100.

What is the monthly payment of a $36,500 loan at 8.5% over 36 periods using the table lookup method? A) $1,152.31 B) $1,013.89 C) $1,156.16 D) 31.57

(36,500/1000) X 31.57 = $1,152.31

As the number of monthly payment increases, the interest payments get ______________________.

Lower

(Finance Charged + Amount Financed)/ Number of Payments = ?

Monthly Payment

Consumers tend to spend _______________ when purchasing with a credit card.

More

When determining the average daily balance, which amount is subtracted?

Payments

Carrie purchases a $4,500 entertainment system on a revolving charge account. The seller charges interest monthly at 12% per year using the unpaid balance method. Carrie pays $400 per month. What is the outstanding balance after the second payment? A) $4,145 B) $4,500 C) $3,786.45

Period 1: $4,500 × 1% = $45. $400 - $45 = $355. $4500 - $355 = $4145. Period 2: $4145 × 1% = 41.45. $400 - 41.45 = $358.55. $4145 - 358.55 $3786.45.

Elizabeth purchased an SUV with a cash price of $28,000 paying $5000 down. She is to make monthly payments of $488.75 for five years. Match the values to the respective terms. A) $6,325 B) $23,000 C) $34,325

A) $6,325 --> Total finance charge B) $23,000 --> Amount financed C) $34,325 --> Deferred payment price

A 2009 act passed to provide better consumer protection in dealing with credit card companies. A) Credit Card Act B) Truth in Lending Act C) Fair Credit and Charge Card Disclosure Act

A) Credit Card Act

A process of paying off an installment loan in a series of equal payments consisting of both principal and interest is ____________________.

Amortization

The __________ represents the true or effective annual interest creditors charge.

Annual Percentage Rate (APR)

Carrie purchases a $4,500 entertainment system on a revolving charge account. The seller charges interest monthly at 12% per year using the unpaid balance method. Carrie pays $400 per month. What is the interest amount in Period 3? A) $45.00 B) $37.86 C) $41.45

Period 1: $4,500 × 1% = $45. $400 - $45 = $355. $4500 - $355 = $4145. Period 2: $4145 × 1% = 41.45. $400 - 41.45 = $358.55. $4145 - 358.55 = $3786.45. Period 3: $3,786.45 ×1% = $37.86.

TJ borrowed $18,000 for 24 periods at 7.5%. Match each of the values to the corresponding step in the "calculating monthly payment by table lookup" process. Step 1 Step 2 Step 3

Step 1 -- 18 Step 2 -- 45 Step 3 -- $810

(Finance charge / Amount financed) x $100 = ?

Table lookup number or APR

Amortization is the: A) process of paying off an installment loan in a series of equal payments consisting of just principal B) process of paying off an installment loan in a lump sum C) process of paying off an installment loan in a series of equal payments consisting of both principal and interest D) process of paying off an installment loan in a series of equal payments consisting of just interest

C) process of paying off an installment loan in a series of equal payments consisting of both principal and interest

Pullman Transport purchased equipment on installment with a cash price of $11,000 paying $1,000 down and agreeing to pay $869.90 per month for one year. What is the deferred payment price? A) $869.90 B) $10,438.80 C) $11,438.80 D) $438.80

$10,438.80 + $1,000 $11,438.80

Pullman Transport purchased equipment on installment with a cash price of $11,000 paying $1,000 down and agreeing to pay $869.90 per month for one year. What is the total finance charge? A) $10,438.80 B) $11,438.80 C) $438.80 D) $869.90

$10,438.80 - $10,000 = $438.80 The total finance charge is found by subtracting the amount financed from the total of all monthly payments.

Cash Price - Down Payment

= Amount Financed

The amount financed is the: A) cash price plus the down payment B) cash price less the down payment C) cash price

B) cash price less the down payment

An installment loan is: A) a loan paid off in a lump sum B) a loan paid off in a series of unequal payments. C) a loan paid off in a series of equal payments

C) a loan paid off in a series of equal payments

Under the unpaid balance method, interest is charged on the: A) monthly balance B) original balance C) average daily balance D) outstanding balance

D) outstanding balance

Total of all monthly payments - Amount Financed =?

Total Finance charge or interest charge

Installment buying is a form of ____-end credit.

closed

Revolving accounts are ______________________ credit lines.

open-ended

Day 1: Previous balance is $1,000. Day 2: Purchase of $20. Day 3: Cash advance of $50. Day 4: Payment of $110. Day 5: Purchase of $35. Find the average daily balance for the five days. A) $1,009 B) $5,045 C) $1,000

Day 1: $1,000. Day 2: $1,000 + $20 = $1,020. Day 3: $1,020 + $50 = $1,070. Day 4: $1,070 less $110 = $960 + $35 = $995. $1,000 + $1,020 + $1,070 + $960 + $995 = $5,045. $5,045 ÷ 5 A) $1,009

The ______________ represents the total of all monthly payments plus the down payment.

Deferred payment price

Total of all monthly payments + Down payment = ?

Deferred payment price

The __________________ payment price is the total of all monthly payments plus the down payment (the total cost of the purchase).

deferred

When paying loan off in installments, the annual percentage rate is (less/greater) _______________________ than the stated rate.

greater

Purchasing goods on installment substantially ______________________ the overall cost of the purchase.

increases or raises

A loan paid off in a series of equal payments is a(n) _______________________ loan.

installment