Loans and Interest Costs Homework

Assignment

Use the terms and formulas below to answer the questions that begin on page 2.

Loan and Interest Terms:

Debtor- The person who is getting the loan and who must pay the debt.

Creditor- The person or institution which is loaning the money and to whom the debt must be paid back.

Principal- The amount of money being borrowed.

Interest- The charge for borrowing the money.

# of Payments (term) - The total number of payments that must be made to pay off the loan. (Usually in months).

Monthly Payment- The amount of money that must be paid each month to the lender (bank).

Annual Percentage Rate (APR) - The true interest rate on a loan; takes into account the compounding of interest.

Amortization Schedule- A chart showing the monthly cost of a loan with different interest rates, terms, and principals

Down Payment- The amount of cash a person pays initially to lower the total amount of money that has to be borrowed.

Basic Formulas/ Equations

Principal = Price of product – Down payment

Down Payment = Price of product – Principal

Price of Product = Principal + Down Payment

Total Cost of a loan = Monthly (periodic) payment x term for the loan

Total Cost of a loan = Principal + Interest

Total Cost of a product (house, car, education) = Principal + Interest + Down Payment

Interest (Credit) Cost/ Finance Charge = Total Cost of a loan – Principal

Principal = Total Cost of a loan – Interest

Types of Loans:

A. Credit Card -

1. Used for smaller everyday purchases (usually)

2. Used in place of cash

3. Interest rate varies depending on bank (9.9%-21%)

4. If paid by end of each month then there is no interest charge

5. May have a yearly service fee (10-40 dollars/yr.)

6. Short term

B. lnstallment

1. Used for larger, durable items (HDTV, computer, washer, stove, car, or boat)

2. Intermediate; longer term (1-5 years)

3. Paid in set increments, periodically, for a set amount of time

C. Mortgage-

1. Used for homes or land

2. Long term (15-30 years)

3. Interest rates can be fixed (set) or variable (fluctuate with interest rate changes)

4. Paid periodically (usually monthly)

D. Home Equity (2nd Mortgage)-

1. Used for 2 reasons:        

                a. Home Improvement- Remodeling, additions, pools               

                b. Debt consolidation- Pay off all of your other debt (credit cards, student loans, car loans) and consolidate them into one (smaller) payment; this reduces your interest PLUS you can take a tax deduction on the interest you pay.

2. Longer term, usually 10-15 years

E. Signature (Line of Credit)

1. Used for a variety of purposes typically for medium sized purchases

2. Pre-approved credit by bank or financial institution

3. Used when you do not want to have to wait to apply for a loan or wait for the bank's approval, i.e. emergencies.

Questions

1. Homer wanted to take Marge and the kids out for pizza to celebrate Bastille Day. After they had eaten he realized that he had left his money at home. What kind of loan would he most likely use to pay for dinner?

2. One day in the middle of the summer the air conditioning went out in Groucho's house in Phoenix. The maintenance man said that Groucho needed to replace the entire unit at a cost of $3000. Groucho did not have this kind of cash so he needed to borrow it. He paid the maintenance man on the spot. What kind of loan did Groucho most likely use to pay for the air conditioner?

3. Mr. McWenie wanted to buy a new car to replace his bucket. He did not have enough cash to pay for a new car so he needed to borrow part of the money. What kind of loan would he most likely use to pay for the car?

4. Which costs more?

a.       A $1000 loan payable in 1 year (12 monthly payments) at $92.00 per month?

b.       A $1000 loan payable in three years (36 monthly payments) at $36.00 per month?

c.        Why might someone choose the more expensive method of payment?

5. Curly, Moe, and Larry each wanted to buy a $200.00 iPhone and they each borrowed the money to buy it. How much did it cost each one? Fill in the chart to answer the question. (Use the Total Cost and Interest Cost formulas from page 1)

                                                                                                                Total Cost                                      Interest cost

A. Curly paid $24/ month for 12 months.

B. Moe paid $6/ week for one year (52 weeks per year).

C. Larry paid $16/ month for 24 months

6. If the price of a house is $350,000 and you  write a check for $50,000 to make a down payment to the seller of the home, how much do you still need to borrow from the bank, i.e, how much is the principal or mortgage loan amount? (Show your work!)

Answer the following questions using the basic formulas on page 1 (or in the Unit 3 Notes and Terms) and the home/mortgage  loan calculator at: https://www.phoenixunion.org/Page/7386. “Start Date” is today’s date.     

7. George and Laura wanted to buy a new home. The house that they were buying cost $200,000. They put a $20,000 down payment on the home. The interest rate on the home is 4% and the term is 30 years (360 months).

What type of loan is this?                                                  What is the monthly payment?

What is the total interest?                                                  What is the total cost for this loan? Show Work!

What is the total cost of the house? Show Work!

8. Barack and Michele are looking to buy a new piece of property adjacent to a new freeway for investment purposes. The price of the land is $500,000. They intend to borrow the entire amount. Interest rates for commercial real estate are 6.0%. They want to borrow money for 15 years (180 months).

What type of loan is this?                                                  What is the monthly payment?

What is the total interest?                                                  What is the total cost for this loan and property? Show Work!

9. What is the monthly payment, the total interest, and total cost for a $200,000 mortgage at 4.5%, for 15 years (180 months)? What is the monthly payment, the total interest, and total cost for $200,000 mortgage at 4.5%, for 30 years (360 months)? Which has a lower monthly payment? Why? Which has a lower total cost? Why?

15 Year Loan                                                                                       30 Year Loan

Monthly Payment:                                                                              Monthly Payment:

Total Interest:                                                                                      Total Interest:

Total Cost of the Loan: Show Work!                                             Total Cost of the Loan: Show Work!

Which has a lower monthly payment? Why?                                                Which has a lower total cost? Why?

Answer the following questions using the basic formulas on page 1 (or in the Unit 3 Notes and Terms) and the auto  loan calculator at: https://www.phoenixunion.org/Page/7387.

10. Hillary and Bill are buying a new BMW 760Li. The sales price is $141,200. They make a $40,000 down payment on the car. Interest rates for car loans are 7%. They want to borrow money for 4 years (48 months). Sales tax is 9%. Assume the “Trade in Amount” and “Owed to Trade” amount are both $0. “Start Date” is today’s date.

What type of loan is this?                                                  What is the monthly payment?

What is the total interest?                                                  What is the total cost for this loan? Show Work!

What is the total cost of the car? Show Work!

11. Mr. McWenie is buying a new Toyota Tacoma 4x4 pickup truck. The sales price is $35,000. He makes a $10,000 down payment on the car. Interest rates for car loans are 6%. He wants to borrow money for 3 years (36 months). Sales tax is 9%. Assume the “Trade in Amount” and “Owed to Trade” amount are both $0. “Start Date” is today’s date.

What type of loan is this?                                                  What is the monthly payment?

What is the total interest?                                                  What is the total cost for this loan? Show Work!

What is the total cost of the car? Show Work!