Closed-End Credit



Closed-End Credit Name _______________________ Block ______________ Date _____________

If you have ever used a credit card to make a purchase, then you’ve used open-end credit. Often times, however, consumers don’t want to use their credit card to make large purchases such as a car or household appliances. Instead they used closed-end credit. Often times, closed-end credit is called an installment loan because the consumer makes a series of payments that include interest. As example of an installment loan, Maggie wants to buy a new Diamondback Mountain bicycle that costs $549.00. When Maggie asks about financing, she is told that after making a 10% down payment, she’ll have to make monthly payments of $44.63 for 12 months. The monthly payments are installments.

To understand an installment contract, let’s continue with the example in the previous paragraph. Let’s assume that Maggie wants the bike and she is shown the agreement below.

FRANK’S FURNITURE

1815 WASHINGTON STREET

MUSCATINE, IA 56231

Retail Installment Contract

Contract No. 83483 Item: Titanium Diamondback Mountain Bike

Buyer’s Name: Maggie Lobiannco

Buyer’s Address: 4567 Mountain Ridge Way

City: Muscatine State: IA Zip 56232

1. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 549.00

2. Down Payment . . . . . . . . . . . . . . . . . . . . . . 54.90

3. Amount Financed . . . . . . . . . . . . . . . . . . . . 494.10

4. Installment Price . . . . . . . . . . . . . . . . . . . . . 590.46

5. Finance Charge . . . . . . . . . . . . . . . . . . . . . 41.46

6. Annual Percentage Rate . . . . . . . . . . . . . . . 18%

The buyer agrees to pay FRANK’S FURNITURE by check the installment price shown above in 12 monthly installments of $44.63. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

This is how to verify the amounts of the installment contract.

Step 1. Check the cash price to see if it matches the price tag.

Step 2. Calculate the amount of the down payment. The down payment is a percent of the purchase price required by the lender that is required immediately. To calculate the down payment Maggie multiplied the cash price by the down payment percent.

$549.00 X .10 = $54.90

Step 3. Find the amount financed. The amount you borrow from the seller is called the amount financed. This is the amount that Maggie must repay over the time of the loan. Maggie finds the amount financed by subtracting the down payment from the cash price.

$549.00 - $54.90 = $494.10

Step 4. Find the installment price. The installment price is the down payment plus the total of all of the monthly payments. Maggie found the installment price by multiplying $44.63 by 12 months. Maggie then added $54.90.

$44.63 X 12 + $54.90 = $590.46

Step 5. Find the finance charge. The finance charge is the difference between the installment price and the cash price.

$590.46 - $549.00 = $41.46

Step 6. The Annual Percentage Rate is a complex formula that belongs in a finance class.[1] In this class, assume that the APR is given and correctly calculated.

Exercises

Directions: Solve the following problems. Write your answers in the blanks provided.

Round dollars to the nearest cent. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

A. Compute the total amount of the installment payments and the installment price. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

|Down |Number of |Installment |Amount of |Installment |

|Payment |Payments |Payment |Installment Payment |Price |

|$120 |12 |$33.56 |1. $402.72 |2. $522.72 |

| $320 |24 |$62.70 |3. |4. |

|$268 |10 |$40.25 |5. |6. |

Examples:

1. $33.56 (Installment Payment) x 12 (# of Payments) = $402.72

2. $402.72 (Amount of Installment Payments) + $120.00 (Down Payment) = $522.72

SHOW YOUR WORK HERE. BE SURE YOU NUMBER YOUR WORK!

B. Compute the amount of the down payment and the amount financed. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

|Cash |Down Payment |Down Payment |Amount |

|Price |(%) |($) |Financed |

|$856.00 |20% |7. $171.20 |8. $1,027.20 |

|$587.00 |15% |9. |10. |

|$1,256.00 |20% |11. |12. |

Example:

7. $856.00 (Cash Price) x .20 (down payment converted to decimal) = $171.20

8. $856.00 (Cash Price) + $171.20 (Down Payment) = $1,027.20

SHOW YOUR WORK HERE. BE SURE YOU NUMBER YOUR WORK!

C. Find the total installment price and finance charge. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

|Cash |Down |Monthly |Number |Amount Financed |Finance Charge |

|Price |Payment |Installment |Of Months | | |

|$900 |$90 |$140.07 |6 months |15. |16. |

Example:

13. $473 (Cash Price) - $47.30 (Down Payment) = $425.70

14. $50.17 (Monthly Installment) x 9 months ( # of months financed) = $451.53

$451.53 (Total Payment $ Amount financed) + $47.30 (down Payment) = $498.83

SHOW YOUR WORK HERE. BE SURE YOU NUMBER YOUR WORK!

D. Solve the following word problems by using your knowledge from the problems you have done. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

Lucille purchased a piano on the installment plan with a down payment of $500 and 24 monthly payments of $92.67. Find the installment price.

17. _______________

Find the total amount of installment payments for Juan Coulter. He bought a Dell computer for his office. He agreed to pay 24 installments of $38.42.

18. ________________

E. Calculate the following information on these installment purchases. A 10% cash down payment has already been taken into account and reflected in the “Amount to Be Financed”. The terms of the installments contracts are: (1) Balance is to be paid off in 12 monthly installments; (2) Interest is 22%. The first row has been completed as an example. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

|Amount to |Total Interest |Amount to Be Repaid |Monthly Installment |

|Be Financed | | | |

|$1,880.00 |$413.60 |$2,293.60 |$191.13 |

|$567.00 |19. |20. |21. |

|$2,178.00 |22. |23. |24. |

|$400.00 |25. |26. |27. |

Example:

$1,880.00 (Amount to be financed) x .22 (Interest converted to decimal) = $413.60 (Total Interest)

$1880.00 (Amount to be financed) + $413.60 (Total Interest) = $2,293.60 (Amount to be repaid)

$2,293.60 (Amount to be repaid) / (divided by) 12 (monthly installments) = $191.13 (Monthly Installment)

SHOW YOUR WORK HERE. BE SURE YOU NUMBER YOUR WORK!

F. Find the installment price and expense of using the installment plan for this purchase. The cash price is $5,500. The down payment is $550. The number of payments is 24. The monthly payment is $252.17. You need to show your work and turn it in on scratch paper or on the back of this sheet otherwise it will be counted ½ credit for work not shown!

28. Installment prince ___________________

29. Finance charge ______________________

SHOW YOUR WORK HERE. BE SURE YOU NUMBER YOUR WORK!

Now the dog work is over. It’s time to apply what you have learned.

HARRY’S AUDIO

815 CEDAR STREET

IOWA CITY, IA 52722

Retail Installment Contract

Contract No. 123483 Item: STUDIO SNOOP DOG HEADPHONES

Buyer’s Name: BEN SHEILD

Buyer’s Address: 987 CYPRESS BOULEVARD

City: Muscatine State: IA Zip 56232

7. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 789.00

8. Down Payment . . . . . . . . . . . . . . . . . . . . . . 157.80

9. Amount Financed . . . . . . . . . . . . . . . . . . . . 30.

10. Installment Price . . . . . . . . . . . . . . . . . . . . . 31.

11. Finance Charge . . . . . . . . . . . . . . . . . . . . . 32.

12. Annual Percentage Rate . . . . . . . . . . . . . . . 18%

The buyer agrees to pay HARRY’S AUDIO by check the installment price shown above in 24 monthly installments of $31.09. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

Show your work for each answer.

30. The amount financed _______________________________________

31. Installment Price __________________________________________

32. Finance Charge ____________________________________________

33. What is the amount of the down payment in percent? ______________

Complete the table below: SHOW YOUR WORK BELOW. BE SURE YOUR NUMBER YOUR WORK!

|Cash |Down |Down Payment |Amount Financed |

|Price |Payment |($) | |

| |(%) | | |

|$856 |20% |34. |35. |

|$928 |10% |36. |37. |

|$723 |15% |38. |39. |

|$478 |20% |40. |41. |

|$250 |10% |42. |43. |

Mikes’s Autos

12 Redd Foxx Lane

Canton, OH 98356

Retail Installment Contract

Contract No. 483 Item: Toyota Camery 1990

Buyer’s Name: Tess Weaver

Buyer’s Address: 1 Hollywood Avenue

City: Columbus State: OH Zip 98342

13. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,500.00

14. Down Payment . . . . . . . . . . . . . . . . . . . . . . 350.00

15. Amount Financed . . . . . . . . . . . . . . . . . . . . 44.

16. Installment Price . . . . . . . . . . . . . . . . . . . . . 45.

17. Finance Charge . . . . . . . . . . . . . . . . . . . . . 46.

18. Annual Percentage Rate . . . . . . . . . . . . . . . 22%

The buyer agrees to pay MIKE’S AUTOS by check the installment price shown above in 36 monthly installments of $118.13. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

44. Amount Financed ______________________

45. Installment Price _______________________

46. Finance Charge ________________________

SHOW YOUR WORK BELOW. BE SURE YOUR NUMBER YOUR WORK!

Closed-End Credit (KEY) Name ________(KEY)________

If you have ever used a credit card to make a purchase, then you’ve used open-end credit. Often times, however, consumers don’t want to use their credit card to make large purchases such as a car or household appliances. Instead they used closed-end credit. Often times, closed-end credit is called an installment loan because the consumer makes a series of payments that include interest. As example of an installment loan, Maggie wants to buy a new Diamondback Mountain bicycle that costs $549.00. When Maggie asks about financing, she is told that after making a 10% down payment, she’ll have to make monthly payments of $44.63 for 12 months. The monthly payments are installments.

To understand an installment contract, let’s continue with the example in the previous paragraph. Let’s assume that Maggie wants the bike and she is shown the agreement below.

FRANK’S FURNITURE

1815 WASHINGTON STREET

MUSCATINE, IA 56231

Retail Installment Contract

Contract No. 83483 Item: Titanium Diamondback Mountain Bike

Buyer’s Name: Maggie Lobiannco

Buyer’s Address: 4567 Mountain Ridge Way

City: Muscatine State: IA Zip 56232

19. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 549.00

20. Down Payment . . . . . . . . . . . . . . . . . . . . . . 54.90

21. Amount Financed . . . . . . . . . . . . . . . . . . . . 494.10

22. Installment Price . . . . . . . . . . . . . . . . . . . . . 590.46

23. Finance Charge . . . . . . . . . . . . . . . . . . . . . 41.46

24. Annual Percentage Rate . . . . . . . . . . . . . . . 18%

The buyer agrees to pay FRANK’S FURNITURE by check the installment price shown above in 12 monthly installments of $44.63. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

This is how to verify the amounts of the installment contract.

Step 1. Check the cash price to see if it matches the price tag.

Step 2. Calculate the amount of the down payment. The down payment is a percent of the purchase price required by the lender that is required immediately. To calculate the down payment Maggie multiplied the cash price by the down payment percent.

$549.00 X .10 = $54.90

Step 3. Find the amount financed. The amount you borrow from the seller is called the amount financed. This is the amount that Maggie must repay over the time of the loan. Maggie finds the amount financed by subtracting the down payment from the cash price.

$549.00 - $54.90 = $494.10

Step 4. Find the installment price. The installment price is the down payment plus the total of all of the monthly payments. Maggie found the installment price by multiplying $44.63 by 12 months. Maggie then added $54.90.

$44.63 X 12 + $54.90 = $590.46

Step 5. Find the finance charge. The finance charge is the difference between the installment price and the cash price.

$590.46 - $549.00 = $41.46

Step 6. The Annual Percentage Rate is a complex formula that belongs in a finance class.[2] In this class, assume that the APR is given and correctly calculated.

Exercises

Directions: Solve the following problems. Write your answers in the blanks provided. Round dollars to the nearest cent.

A. Compute the total amount of the installment payments and the installment price.

|Down |Number of |Installment |Amount of |Installment |

|Payment |Payments |Payment |Installment Payment |Price |

|$120 |12 |$33.56 |1. $ 402.72 |2. $ 522.72 |

|$320 |24 |$62.70 |3. $1,504.80 |4. $1,824.80 |

|$268 |10 |$40.25 |5. $ 402.50 |6. $ 670.50 |

B. Compute the amount of the down payment and the amount financed.

|Cash |Down Payment |Down Payment |Amount |

|Price |(%) |($) |Financed |

|$856.00 |20% |7. $171.20 | 8. $1,027.20 |

|$587.00 |15% |9. $ 88.05 |10. 675.05 |

|$1,256.00 |20% |11. $251.20 |12. $1,507.20 |

C. Find the total installment price and finance charge.

|Cash |Down |Monthly |Number |Amount Financed |Finance Charge |

|Price |Payment |Installment |Of Months | | |

|$900 |$90 |$140.07 |6 months |15. $810.00 |16. $930.42 |

D. Solve the following word problems.

Lucille purchased a piano on the installment plan with a down payment of $500 and 24 monthly payments of $92.67. Find the installment price.

17. _$2,724.08____

Find the total amount of installment payments for Juan Coulter. He bought a Dell computer for his office. He agreed to pay 24 installments of $38.42.

18. __$922.08_______

E. Calculate the following information on these installment purchases. A 10% cash down payment has already been taken into account and reflected in the “Amount to Be Financed”. The terms of the installments contracts are: (1) Balance is to be paid off in 12 monthly installments; (2) Interest is 22%. The first row has been completed as an example.

|Amount to |Total Interest |Amount to Be Repaid |Monthly Installment |

|Be Financed | | | |

|$1,880.00 |$413.60 |$2,293.60 |$191.13 |

|$567.00 |19. $124.74 |20. $ 691.74 |21. $ 57.65 |

|$2,178.00 |22. $479.16 |23. $2,657.16 |24. $221.43 |

|$400.00 |25. $ 88.00 |26. $ 488.00 |27. $ 40.67 |

F. Find the installment price and expense of using the installment plan for this purchase. The cash price is $5,500. The down payment is $550. The number of payments is 24. The monthly payment is $252.17.

28. Installment prince ____$11,002.08________

29. Finance charge _______$5502.08 OUCH_______

Now the dog work is over. It’s time to apply what you have learned.

HARRY’S AUDIO

815 CEDAR STREET

IOWA CITY, IA 52722

Retail Installment Contract

Contract No. 123483 Item: STUDIO SNOOP DOG HEADPHONES

Buyer’s Name: BEN SHEILD

Buyer’s Address: 987 CYPRESS BOULEVARD

City: Muscatine State: IA Zip 56232

25. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 789.00

26. Down Payment . . . . . . . . . . . . . . . . . . . . . . 157.80

27. Amount Financed . . . . . . . . . . . . . . . . . . . . 30.

28. Installment Price . . . . . . . . . . . . . . . . . . . . . 31.

29. Finance Charge . . . . . . . . . . . . . . . . . . . . . 32.

30. Annual Percentage Rate . . . . . . . . . . . . . . . 18%

The buyer agrees to pay HARRY’S AUDIO by check the installment price shown above in 24 monthly installments of $31.09. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

SHOW YOUR WORK BELOW. BE SURE YOUR NUMBER YOUR WORK!

30. The amount financed __________ $631.20_____________________

31. Installment Price ______________$903.96_____________________

32. Finance Charge _______________ $272.76______________________

33. What is the amount of the down payment in percent? ___20%________

Complete the table below:

|Cash |Down |Down Payment |Amount Financed |

|Price |Payment |($) | |

| |(%) | | |

|$856 |20% |34. $171.20 |35. $684.80 |

|$928 |10% |36. $ 92.80 |37. $835.20 |

|$723 |15% |38. $108.45 |39. $614.55 |

|$478 |20% |40. $ 95.60 |41. $382.40 |

|$250 |10% |42. $ 25.00 |43. $225.00 |

Mike’s Autos

12 Redd Foxx Lane

Canton, OH 98356

Retail Installment Contract

Contract No. 483 Item: Toyota Camery 1990

Buyer’s Name: Tess Weaver

Buyer’s Address: 1 Hollywood Avenue

City: Columbus State: OH Zip 98342

31. Cash Price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,500.00

32. Down Payment . . . . . . . . . . . . . . . . . . . . . . 350.00

33. Amount Financed . . . . . . . . . . . . . . . . . . . . 44.

34. Installment Price . . . . . . . . . . . . . . . . . . . . . 45.

35. Finance Charge . . . . . . . . . . . . . . . . . . . . . 46.

36. Annual Percentage Rate . . . . . . . . . . . . . . . 22%

The buyer agrees to pay MIKE’S AUTOS by check the installment price shown above in 36 monthly installments of $118.13. The first installment is payable on June 1, 2011, and all subsequent payments are to be made on first day of each consecutive month until the installment price is paid in full.

44. Amount Financed _______$3,150.00___________

45. Installment Price ________$4,602.68__________

46. Finance Charge _________$1102.68_______

-----------------------

[1] r = ( 1 + i/n)n – 1, where r is the effective rate, i is the nominal rate, and n is the number of compounding periods. For continuous compounding, ei - 1.

[2] r = ( 1 + i/n)n – 1, where r is the effective rate, i is the nominal rate, and n is the number of compounding periods. For continuous compounding, ei - 1.

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