Question
7. Calculating finance charges using the discount method and APRon a single-payment loan You are taking out a single-payment loan that uses the discount method
7. Calculating finance charges using the discount method and APRon a single-payment loan
You are taking out a single-payment loan that uses the discount method to compute the finance charges. Computing the finance charges is done the same as the way theyre computed using the simple interest method. Under the discount method, a borrower receives the principal the finance charges. For example, if the principal is $8,000 and the finance charges are $1,280, the borrower will receive $ .
The following equation computes the finance charges on your loan:
FdFd = FsFs = P r t
In the equation, FdFd is the finance charge for the loan. What are the other values?
P is the principal amount of the loan.
r is the stated annual rate of interest.
t is the term of the loan in years .
Youre borrowing $6,000 for two years with a stated annual interest rate of 8%. Complete the following table. (Note: Round your answers to the nearest dollar.)
Principal | $6,000 |
Finance charges |
|
Loan disbursement |
|
Total payback |
|
Annual Percentage Rate (APR)
You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate.
APRAPR | = = | Average Annual Finance ChargeAverage Loan Balance Outstanding Average Annual Finance ChargeAverage Loan Balance Outstanding |
First, compute the average annual finance charge by dividing the total finance charge of
by the life of the loan, which is two years (2.0 years) =
(Note: Round your answers to the nearest dollar.)
Next, as a single-payment loan, the average loan balance outstanding is constant at the
, in this case,
.
Complete the calculation. (Note: Round your answers to the nearest dollar and your percentage point to the nearest two decimal places.)
APR | = | Average Annual Finance Charge / Average Loan Balance Outstanding |
= | /
| |
= | % |
The APR is the stated interest rate because the
Loan is a single-payment loan
Discount method was used to calculate finance charges
Formula to compute finance charges is the same for the discount and simple interest methods
Term of the loan is more than six months
Grade It Now
Save & Continue
Continue without saving
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started