Math 11AW Unit 7: Financial Services



Math 11AW Unit 7: Financial Services. Name: ___________________ Date: _____________ Block: ______

Lesson Notes 7.2: Loans.

Try these:

i) 18% of $1900 = $ 342 ii) 80% of $960 = $ 768 .

iii) 50% of $6000 = $ 3000 iv) 9% of $3200 = $288

Key words:

Collateral : an asset, such as a car or property, that the lender may take if the borrower cannot

repay the loan.

Equity: the difference between the value of a property and the claims against it.

One way to borrow money is to get a loan. With most loans, interest is calculated daily and paid monthly. Loans are either secured or unsecured. A secured loan requires collateral. This chart shows information about different types of loans.

[pic]

Example 1) Doug wants a secured loan to start his own painting business.

• Doug will use his car as collateral.

• The bank will loan Doug 75% of his car's equity.

• Doug's car is worth $45 000. He owes $15 000 on it.

How much will the bank lend Doug?

Solution:

i) What is the equity in Doug's car?

$45000 – $ 15000 = $ 30 000.

ii) What is 75% of the equity in Doug's car?

0.75 x $ 30 000 = $ 22 500

The bank will lend Doug $ 22 500

Example 2) Brittany is borrowing $3200 for 6 mo. She has good credit. What type of loan should she get? Justify your answer.

Solution:

A secured personal loan, because it will cost the least interest. If Brittany used a credit card she may not pay this balance for months. The interest would be high. Interest on a payday loan very high. An unsecured loan would cost more than a secured loan.

Example 3) Brenda is lending Fatouma $600 to buy a sewing machine to start a small business. Brenda charges simple interest at 2%/yr. At the end of 1 yr, Fatouma will repay Brenda. How much will Fatouma owe?

Solution:

Fatouma is paying simple interest: I = Prt

[pic]

Example 4) Nicolas is paying his $18 900 student loan. The interest rate is 3.2%/yr. It is compounded daily and payable monthly. In his first payment, Nicolas will pay the interest owing. He will also pay an extra $300 of the principal. How much is Nicolas's first payment?

Solution:

i) What interest does Nicolas owe?

[pic]

ii) What is Nicolas's first payment for the interest plus the extra $300?

Payment: $ 49.77 + $ _300_ = $ 349.77_

Nicolas's first payment is $ 349.77_.

Example 5) Richard’s car insurance of $1400.00 was due in two days and he did not have the cash

available. He went to a payday loan store for a loan. He had to repay the store $1635.20 within 14 days.

a) What was the daily interest rate for the loan?

$1635.20 – $1400.00 = $ 235.20

[pic]

b) What was the annual interest rate for the loan?

1.2 % x 365 = 438 %

Math 11AW Unit 7: Financial Services. Name: ___________________ Date: _____________ Block: ______

Assignment 7.2: Loans.

1. Match each person with the loan you suggest.

Person Loan

Greg starts his new job in 2 wk. He must borrow unsecured personal loan

money to pay his rent. Greg has a good credit rating.

He has never borrowed money.

Scotty is going to buy a $40 000 pickup truck for auto loan

work. He has just bought a condominium with

his savings.

Sharla has just paid her car loan. She wants a loan student loan

to pay for a vacation.

Brent is going to school to learn welding. He needs secured personal loan

money for tuition.

2. Jill is buying a new refrigerator. She cannot afford to pay cash. Should she use a credit card or get a personal loan? Justify your answer.

She should use a credit card if she can pay off the balance before the date the payment is due, or she should use a personal loan if it will take longer to pay

3. Liam, a taxi driver in Revelstoke, wants to buy a new taxi. He was approved for the loans in this chart.

a) What should Liam think about when he chooses a loan?

How long he will need to pay off the loan; what he can afford to pay each month; how long the taxi will last.

b) Which loan should Liam choose? Explain why.

Liam should choose the secured personal loan, because it has the lowest interest rate.

4. Hannah says that using payday loans and cash advances on credit cards are bad choices for borrowing money. Do you agree or disagree? Explain.

Agree, interest is very high on payday loans and cash advances. The money may be needed for something else on payday and it might be difficult to pay the loan back quickly.

5. Kumal wants to sell her townhouse in Whitehorse. She will spend $21 00 updating her home. She has $21 00 in cash, but she plans to buy a $2100 RASP. She will need 120 d to pay off any loan. Interest is compounded daily.

a) Complete the chart.

[pic]

b) Which option should Kumal choose? Explain why.

The options are: RRSP loan; Kumal can still buy an RRSP, which has a low interest rate, or secured personal loan; Kumal can still get an RRSP, and the secured personal loan has a low interest rate.

c) Which option should Kumal not choose? Explain why.

The option of not getting a loan is not wise, Kumal should get an RRSP to save for retirement, and an RRSP would give her a tax refund. Using her credit card is not an option because the interest rate is very high, resulting in the greater borrowing costs.

d) Suppose Kumal uses a RRSP loan instead of her credit card. How much interest will she save?

$ 101.24 - $ 19.07 = $ 84.25

She would save $ 84.25.

6. What is equity? What is it used for?

Equity is the difference between what an asset is worth and what is owed on it. It is often used as collateral on a loan.

7. Safia borrowed $500.00 from a payday loan store and agreed to repay it in 30 days at a rate of 1.15% per day. How much will Safia have to repay?

Use the simple interest formula, except that interest calculated daily.

I = 500 x 0.0115 x 30 = $ 172.5

A = $ 500 + $ 172.5 = $ 672.5

8. Hayden borrowed $400.00 and paid back $415.00 in 10 days.

a) What was the annual interest rate?

I = $ 415 – $ 400 = $ 15.0; r = [pic] = [pic] = 0.00375 = 0.375%

0.375% x 365 = 136.875 %

b) What was the daily interest rate?

The daily interest rate is 0.375%

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