## 11.2 Outline

1. Terminology
1. types of installments
1. closed-end loan
2. open- end loan
2. ways of calculating interest
2. amortization
1. installment loan formulas
3. Annual percentage rate (APR)
1. APR formula
2. compare 0% financing with APR
4. . Open-end credit
5. Credit card interest
1. finance charge
2. previous balance method
4. average daily balance method
5. grace period

## 11.2 Essential Ideas

Installment loans:

AMOUNT OF INTEREST: I = Prt

Formulas

AMOUNT TO BE REPAID:

A = P + I   or   A = P (1 +rt)

NUMBER OF PAYMENTS:

N=12t

AMOUNT OF EACH PAYMENT:

m = A/N

The annual percentage rate, or APR, is the rate paid on a loan when that rate is based on the actual amount owed for the length of time that it is owed.  It can be found for an add-on interest rate, r, with N payments by using the formula

APR = 2Nr/(N +1)

Methods of calculating credit card interest:

Previous balance method  Interest is calculated on the previous month’s balance.
Adjusted balance method Interest is calculated on the previous month’s balance less credits and payments.
Average daily balance method  Add the outstanding balances for each day in the billing period and then divide by the number of days in the billing period to find the average daily balance.