1. Zachary Porter of Highland Heights, Kentucky, is contemplating borrowing $10,000 from his bank. The bank could use add-on rates of 6.5 percent for 3 years, 7 percent for 4 years, and 8 percent for 5 years. Use Equation 7.1 to calculate the finance charge and monthly payment for these three options.

2. Kimberly Jensen of Griffin, Georgia, wants to buy some living room furniture for her new apartment. A local store offered credit at an APR of 16 percent, with a maximum term of four years. The furniture she wishes to purchase costs $2800, with no down payment required. Using Table or the Garman/Forgue companion website, make the following calculations:

(a) What is the amount of the monthly payment if she borrowed for four years?

(b) What are the total finance charges over that four-year period?

(c) How would the payment change if Kimberly reduced the loan term to three years?

(d) What are the total finance charges over that three-year period?

(e) How would the payment change if she could afford a down payment of $500 with four years of financing?

(f) What are the total finance charges over that four-year period given the $500 down payment?

3. Kayla Sampson, an antiques dealer from Great Bend, Kansas, received her monthly billing statement for April for her MasterCard account. The statement indicated that she had a beginning balance of $600, on day 5 she charged $150, on day 12 she charged $300, and on day 15 she made a $200 payment. Out of curiosity, Kayla wanted to confirm that the finance charge for the billing cycle was correct.

(a) What was Kayla’s average daily balance for April without new purchases?

(b) What was her finance charge on the balance in part (a) if her APR is 19.2 percent?

(c) What was her average daily balance for April with new purchases?

(d) What was her finance charge on the balance in part (c) if her APR is 19.2 percent?

4. Alexis Monroe, a biologist from Storm Lake, Iowa, is curious about the accuracy of the interest charges shown on her most recent credit card billing statement, which appears in Figure. Use the average daily balances provided to recalculate the interest charges, and compare the result with the amount shown on the statement.

5. James Sprater of Conway, South Carolina, has been shopping for a loan to buy a new car. He wants to borrow $18,000 for four or five years. James’s credit union offers a declining-balance loan at 9.1 percent for 48 months, resulting in a monthly payment of $448.78. The credit union does not offer five-year auto loans for amounts less than $20,000, however. If James borrowed $18,000, this payment would strain his budget. A local bank offered current depositors a five-year loan at a 9.34 percent APR, with a monthly payment of $376.62. This credit would not be a declining-balance loan. Because James is not a depositor in the bank, he would also be charged a $25 credit check fee and a $45 application fee. James likes the lower payment but knows that the APR is the true cost of credit, so he decided to confirm the APRs for both loans before making his decision.

(a) What is the APR for the credit union loan?

(b) Use the n-ratio formula to confirm the APR on the bank loan as quoted for depositors.

(c) What is the add-on interest rate for the bank loan?

(d) What would be the true APR on the bank loan if James did not open an account to avoid the credit check and application fees?

6. Miguel Perez of Norfolk, Nebraska, obtained a two-year installment loan for $1500 to buy some furniture eight months ago. The loan had a 12.6 percent APR and a finance charge of $204.72. His monthly payment is $71.03. Miguel has made eight monthly payments and now wants to pay off the remainder of the loan. The lender will use the rule of 78s method to calculate a prepayment penalty.

(a) How much will Miguel need to give the lender to pay off the loan?

(b) What is the dollar amount of the prepayment penalty on this loan?