Ch. 7.

Monthly Payments and Finance Charges.

Kimberly Jensen and Rebecca Parker, are both single. The pair share an apartment on the limited resources provided through Kimberly's disability check from Social Security and Rebecca's part-time job at a grocery store. The two grew tired of their old furniture and went shopping. A local store offered credit at an APR of 16 percent, with a maximum term of four years. The furniture they wish to purchase costs $2800, with no down payment required. Using Table 7-1, make the following calculations:

(a) What is the amount of their monthly payment if they borrow for four years?

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

(c) How would the payment change if Kimberly and Rebecca 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 they 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?

(g) How would the payment change if they could afford a down payment of $500 with three years of financing?

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

Table 7-1: Monthly Principal and Interest Payment Required to Repay $1000 APR 12 Mo 36 Mo 60 Mo $86.01 $30.42 $19.33 $86.99 $31.34 $20.28 10 $87.92 $32.27 $21.25 $88.85 $33.21 $22.24 12 $90.26 $24.67 $23.79 15 18 $91.66 $36.15 $25.39 Calculating the monthly payment on a loan can be complicated as it involves time value of money considerations as were discussed in Chapter 1 Table 7-1 can be used to calculate monthly payments amounts. For example, a three-year loan at 12 percent would require a monthly payment $33.21 for every $1000 borrowed. If you borrowed $4000, your monthly payment would be $132.84 which is 4 times $33.21 If you borrowed $4563 you would multiply 4.563 times $33.21 for a monthly payment of $151.54