Section 11.4
Installment
Buying
Copyright 2013, 2010, 2007, Pearson, Education, Inc.
INB Table of Contents
2.3-2
Date
Topic
February 17, 2014
Section 11.4 Examples
34
February 17, 2014
Section 11.4 Notes
35
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Page #
What You Will Learn
 Fixed Installment Loans
 Open-End Installment Loan
11.4-3
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Installments
 A fixed installment loan is one on which
you pay a fixed amount of money for a set
number of payments.
 Examples: college tuition loans, loans for
cars, boats, appliances, furniture, etc.
 They are usually repaid in 24, 36, 48 or 60
months.
11.4-4
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Installments
An open-ended installment loan is
a loan on which you can make
variable payments each month.
Example: credit cards
11.4-5
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Truth in Lending Act in 1968
 This law requires that the lending institution
tell the borrower two things:
 The annual percentage rate (APR) is the
true rate of interest charged for the loan.
 The total finance charge is the total amount
of money the borrower must pay for borrowing
the money: interest plus any additional fees
charged.
11.4-6
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Total Installment Price
The total installment price is the
sum of all the monthly payments and
the down payment, if any.
11.4-7
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Table 11.2
11.4-8
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Installment Payment Formula
m is the installment payment
p is the amount financed
r is the APR as a decimal
n is the number of payments per year
t is the time in years
m
11.4-9
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r
p 
 n

r
1  1  
n

 nt
Example 2: Using the Installment
Payment Formula
Kristin Aiken wishes to purchase new window
blinds for her house at a cost of $1500. The home
improvement store has an advertised finance
option of no down payment and 6% APR for 24
months.
Determine Kristin’s monthly payment.
11.410
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Repaying an Installment Loan
Early
 By paying off a loan early, one is not
obligated to pay the entire finance
charge.
 The amount of the reduction of the
finance charge from paying off a loan
early is called the unearned interest.
11.413
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Repaying an Installment Loan
Early
 Two methods are used to determine the
finance charge when you repay an
installment loan early.
 The actuarial method uses the APR tables.
 The rule of 78s does not use the APR tables,
is less frequently used, and is outlawed in
much of the country.
11.414
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Actuarial Method for Unearned
Interest
n  P V
u
100  V
u is unearned interest
n is # of remaining monthly payments
P is the monthly payment
V is the value from the APR table for the # of
remaining payments
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Example 5: Using the Actuarial
Method
Tino Garcia borrowed $9800 to purchase a classic 1966
Ford Mustang. The APR is 7.5% and there are 48
payments of $237. Instead of making his 30th payment of
his 48-payment loan, Tino wishes to pay his remaining
balance and terminate the loan.
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Example 5: Using the Actuarial
Method
a)
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Use the actuarial method to determine how much
interest Tino will save (the unearned interest, u) by
repaying the loan early.
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Example 5: Using the Actuarial
Method
b)
11.420
What is the total amount due to pay off the loan early
on the day he makes his final payment?
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Example 5: Using the Actuarial
Method
b) What is the total amount due to pay
off the loan early on the day he
makes his final payment?
Solution
Remaining payments including interest
total 18($237) = $4266, his
remaining balance excluding his
30th payment is $4266 – $242.99 =
$4023.01
11.421
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Open-End Installment Loans
A credit card is a popular way of
making purchases or borrowing
money.
Typically, credit card accounts report:
*These rates vary with different credit card accounts and localities.
11.423
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Open-End Installment Loans
Typically, credit card monthly statements contain
the following information:
 balance at the beginning of the period
 balance at the end of the period (or new
balance)
 the transactions for the period
 statement closing date (or billing date)
 payment due date
 the minimum payment due
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Open-End Installment Loans
For purchases, there is no finance or interest
charge if there is no previous balance due and you
pay the entire new balance by the payment due
date.
The period between when a purchase is made and
when the credit card company begins charging
interest is called the grace period and is usually 20
to 25 days.
11.425
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Open-End Installment Loans
However, if you use a credit card to
borrow money, called a cash advance,
there generally is no grace period and
a finance charge is applied from the
date you borrowed the money until the
date you repay the money.
11.426
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Average Daily Balance
 Many lending institutions use the average daily
balance method of calculating the finance
charge because they believe that it is fairer to
the customer.
 With the average daily balance method, a
balance is determined each day of the billing
period for which there is a transaction in the
account.
11.427
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Example 8: Using the Average
Daily Balance Method
The balance on Min Zeng’s credit card account on July 1,
the billing date, was $375.80. The following transactions
occurred during the month of July.
July
July
July
July
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5
10
18
28
Payment
Charge: Toy store
Charge: Garage
Charge: Restaurant
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$150.00
$74.35
$123.50
$42.50
Example 8: Using the Average
Daily Balance Method
1) find the balance by date
2) Find the number of days that the balance
did not change between each
transaction. Count the first day in the
period but not the last day.
3) Multiply the balance due by the number
of days the balance did not change.
4) Find the sum of the products.
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Example 8: Using the Average
Daily Balance Method
a) Determine the average daily balance
for the billing period.
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Example 8: Using the Average
Daily Balance Method
b)
11.434
Determine the finance charge to be paid on August 1,
Min’s next billing date. Assume that the interest rate is
1.3% per month.
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Example 8: Using the Average
Daily Balance Method
c) Determine the balance due on
August 1.
11.436
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