Loans

Section 4.2

Whenever you borrow money, you must

sign an agreement. Promissory Note States the conditions of the loan Should read this carefully before

signing

Loans (4.2)

Some Key Terms: Cosigner:

Life Insurance:

Wage Assignment:

Loans (4.2)

Another person who agrees to pay back the loan if the borrower is unable to do so.

Sometimes required, in the event the borrower dies before loan is paid off

Voluntary deduction from your paycheck to pay off the loan

Some Key Terms:

Wage Garnishment:

Balloon Payment:

Loans (4.2)

Involuntary form of wage assignment

The last payments can be higher than the previous. These are called balloon payments.

Where can you go to take out a loan?

o Bankso Credit Unionso Consumer Finance Companieso Life Insurance Companieso Pawnshops

Loans (4.2)

Banks

Offer good interest rates Must have good credit or have a cosigner

Credit Unions Provided for members only Members usually work in the same office, be in

the same profession, live in the same complex, etc.

Typically offer the lowest interest rate

Loans (4.2)

Consumer Finance Companies

Offer loans to those with poor credit Charge high interest rates

Life Insurance Companies Offer loans to their policyholders Interest rate is based on the coverage a person

has Minimal risk to life insurance company

Loans (4.2)

Pawnshops

Short-term loans Leave a personal belonging as collateral Most loans are only 30-, 60-, or 90-days

Loan Sharks Illegal Extremely high interest No credit check

Loans (4.2)

Figuring out your monthly payments

Chart on page 183 of the book This is for $1,000 principal

Loans (4.2)

What is the monthly payment for a $4,000

two-year loan with an APR of 8.5%?

From chart: 45.46

For $4,000, multiply 45.46 by 4

= $181.84 monthly payment

Loans (4.2)

Juan is borrowing $41,000 for 5 years at an

APR OF 6.5%. What is the monthly payment?

From chart: 19.57

For $41,000, multiply this by 41

= $802.37

Loans (4.2)

How much would you have to pay back, in

total, if you borrowed $5,000 for 4 years at an interest rate of 8.25%?

From chart: 24.53

For $5,000, multiply this by 5Monthly Payment = $122.65How much would this cost for 4 years?

($102)(48) =

Loans (4.2)

$5,887.20

Page 185, 2-8

Loans (4.2)

Many students asked about “student loans” on

the midterm.

Quick video from youtube on student loans:

Loans (4.2)

Loans

Section 4.2

Last week, we started calculating the monthly

payments on loans using the chart on page 183.

Find the rate & time period of the loan

Multiply the number in the intersecting box by the principal of the loan

Loans (4.2)

Find the monthly payment for a $10,000 loan

at 10.5% for 4 years.

From chart: 26.50

For $10,000, multiply this by 10

= $265.00

Loans (4.2)

Last week, we began working on numbers 2-8

on page 185

Loans (4.2)

Loans

Section 4.2

2) Arrange the following in descending order:

9 ½ %, 9%, 9 %, 9.45%, 9 %

Loans (4.2)

3) How many more monthly payments are made for a five-year loan than for a two-year loan?

Loans (4.2)

4) How many monthly payments must be made

for a 2 ½ year loan?

Loans (4.2)

5) Bart needs to borrow $7,000 from a local

bank. He compares monthly payments for a 9.75% loan for three different periods of time.

a) What is the monthly payment for a one-year loan?

b) What is the monthly payment for a three-year loan?

c) What is the monthly payment for a five-year loan?

Loans (4.2)

6) Rachel has a $10,000, three-year loan with an APR of 7.25%.

a) What is the monthly payment?b) What is the total amount of the monthly

payments?c) What is the finance charge?

Loans (4.2)

7) Melissa wants to check the accuracy of the

finance charge on her promissory note. She has a $6,000, four-year loan at an APR of 10%.

a) What is the monthly payment?b) What is the total amount of the monthly

payments?c) What is the finance charge?

Loans (4.2)

8) The policy of the Broadway Pawnshop is to lend up to 35% of the value of a borrower’s collateral. John wants to use a $3,000 ring and a $1,200 necklace as collateral for a loan. What sit eh maximum amount that he could borrow from Broadway?

Loans (4.2)

You are buying a new car and need a loan of

$28,716. You plan on taking out a 4-year loan at an APR of 5.12%. What is your monthly payment?

When the number of years or APR are not on the chart, we must use the monthly payment formula.

Loans (4.2)

Monthly Payment Formula:

M = Monthly Payment

P = Principal

Loans (4.2)

M=P ( 𝑟12 )(1+ 𝑟

12 )12 𝑡

(1+ 𝑟12 )

12𝑡

−1

r = Interest Rate

t = Number of Years

You are buying a new car and need a loan of

$28,716. You plan on taking out a 4-year loan at an APR of 5.12%. What is your monthly payment?

Loans (4.2)

M=28,716 ( 0.051212 )(1+ 0.051212 )

12 ∙ 4

(1+ 0.051212 )12∙ 4

−1

You are buying a new car and need a loan of

$28,716. You plan on taking out a 4-year loan at an APR of 5.12%. What is your monthly payment?

Loans (4.2)

M=150.3027620.226745015¿ $662.87

Juliana is taking out an $8,700, 3 ½ year loan

with an APR of 9.31%. What will the monthly payment be for this loan?

Loans (4.2)

M=8,700 ( 0.093112 )(1+ 0.093112 )

12 ∙3.5

(1+ 0.093112 )12∙ 3.5

−1

Juliana is taking out an $8,700, 3 ½ year loan

with an APR of 9.31%. What will the monthly payment be for this loan?

Loans (4.2)

M=93.380545730.383466732¿ $243.52

On pages 185 & 186, continue working on

numbers 9 – 16 (skip 15)

Loans (4.2)

The Fortunato family is buying a $430,000

home. They are taking out a 30-year mortgage at a rate of 8%.

Loans (4.2)

The Fortunato family is buying a $430,000

home. They are taking out a 30-year mortgage at a rate of 8%.

Loans (4.2)

The Fortunato family is buying a $90,000

home. They are taking out a 30-year mortgage at a rate of 4.5%.

Loans (4.2)