11.2 Outline
- Terminology
- types of installments
- closed-end loan
- open- end loan
- ways of calculating interest
- add-on interest
- amortization
- types of installments
- . Add-on interest
- installment loan formulas
- buying a car
- Annual percentage rate (APR)
- APR formula
- compare 0% financing with APR
- . Open-end credit
- Credit card interest
- finance charge
- previous balance method
- adjusted balance method
- average daily balance method
- 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.