Chapter 14

Installment Buying, Rule

of 78, and Revolving
Charge Credit Cards
McGraw-Hill/Irwin

2008 The McGraw-Hill Companies, All Rights Reserved

#14

Installment Buying, Rule of 78, and

Revolving Charge Credit Cards

Learning Unit Objectives

LU14.1 Cost of Installment Buying
Calculate the amount financed, finance

charge, and deferred payment

Calculate the estimated APR by table

lookup
Calculate the monthly payment by

formula and by table lookup

14-2

#14

Installment Buying, Rule of 78, and

Revolving Charge Credit Cards

Learning Unit Objectives

Paying
Off
Installment
Loan
before
LU14.2
Due Date
Calculate the rebate and payoff
for Rule of 78

14-3

#14

Installment Buying, Rule of 78, and

Revolving Charge Credit Cards

Learning Unit Objectives

LU14.3 Revolving Charge Credit Cards

Calculate the finance charges on

revolving charge credit card accounts

14-4

Cost of Installment Buying

Amount financed (AF)- the amount
actually borrowed.

AF = Cash Price - Down Payment

Finance charge (FC) - the interest

charge.
FC = Total of all
- Amount
monthly payments financed
14-5

Deferred payment price (DPP) the total of all monthly payments

plus the down payment.
DPP = Total of all
+ Down
monthly payments payment

Installment loan - a loan paid

of in a series of equal periodic
payments. Payments include
interest and principal.

Cost of Installment Buying

Mary Wilson would
like to buy a boat that
cost $9,345. If she
puts down $300 she
can finance the
balance for 60
months at 10.5%
(monthly payment =
$194.38). Calculate
the amount financed,
finance charge, and
deferred payment
price.
14-6

Amount financed = Cash price - Down

payment

$9,045 = $9,345 - $300

Finance Charge = Total of all
- Amount
monthly payments financed
$2,617.80 = $11,662.80 - $9,045
($194.38 x 60)

Deferred payment = Total of all + Down

Price
monthly
payment
payments
$11,962.80 = $11,662.80 + $300

Calculating APR by Table

Step 3. When you find the number of
payments you are looking for, move to the
right and look for the two numbers closest
to the table lookup number. This will
indicate the APR.
Step 2. Go to APR Table 14.1. At the left
side of the table are listed the number of
payments that will be made.

Step 1. Divide the finance charge by amount

financed and multiply by $100 to get the table
lookup factor.
14-7

Annual Percentage Rate (APR)

Calculating APR rate by table
Finance charge x $100 = Table 14.1
Amount financed
lookup #
$2,617.80 x 100 = $28.94
$9,045

Between 10.25% - 10.50%

14-8

Table 14.1 - Annual Percentage Rate Table

per $100
Annual percentage rate table per $100 (Partial)
# of Payments 10.00%

14-9

10.25%

10.50%

10.75%

11.00%

11.25%

11.50%

11.75%

12.00%

12.25%

12.50%

36

16.16

16.58

17.01

17.43

17.86

18.29

18.71

19.14

19.57

20.00

20.43

37

16.62

17.06

17.49

17.93

18.37

18.81

19.25

19.69

20.13

20.58

21.02

38

17.08

17.53

17.98

18.43

18.88

19.33

19.78

20.24

20.69

21.15

21.61

39

17.54

18.00

18.46

18.93

19.39

19.86

20.32

20.79

21.26

21.73

22.20

40

18.00

18.48

18.95

19.43

19.90

20.38

20.86

21.34

21.82

22.30

22.79

41

18.47

18.95

19.44

19.93

20.42

20.91

21.40

21.89

22.39

22.88

23.38

42

18.93

19.43

19.93

20.43

20.93

21.44

21.94

22.45

22.96

23.47

23.98

43

19.40

19.91

20.42

20.94

21.45

21.97

22.49

23.01

23.53

24.05

24.57

44

19.86

20.39

20.91

21.44

21.97

22.50

23.03

23.57

24.10

24.64

25.17

45

20.33

20.87

21.41

21.95

22.49

23.03

23.58

24.12

24.67

25.22

25.77

46

20.80

21.35

21.90

22.46

23.01

23.57

24.13

24.69

25.25

25.81

26.37

47

21.27

21.83

22.40

22.97

23.53

24.10

24.68

25.25

25.82

26.40

26.98

48

21.74

22.32

22.90

23.48

24.06

24.64

25.23

25.81

26.40

26.99

27.58

49

22.21

22.80

23.39

23.99

24.58

25.18

25.78

26.38

26.98

27.59

28.19

50
60

22.69
27.48

23.29
28.22

23.89
28.96

24.50
29.71

25.11
30.45

25.72
31.20

26.33
31.96

26.95
32.71

27.56
33.47

28.18
34.23

28.80
34.99

Calculating the Monthly Payment by Formula

Finance charge + Amount financed

Number of payments of loan
$2,617.80 + $9,045
60
$194.38

14-10

Calculating the Monthly Payment by Table

Step 3. Multiply the quotient in Step 1 by
the factor in Step 2
9.045 x $21.49 = $194.38
Step 2. Look up the rate (10.5%) and the
number of months (60). At the intersection
is the table factor showing the monthly
payment per $1,000 ($21.49)
Step 1. Divide the loan amount by $1,000
$9,045 = 9.045
$1,000

14-11

Table 14.2 - Loan Amortization Table

(Monthly payment per $1,000 to pay principal and interest on installment loan)
(Partial)

Terms in
months
6
12
18
24
30
36
42
48
54
60

14-12

7.50%
$170
86.76
58.9
45
36.66
31.11
27.15
24.18
21.88
20.04

8.00%
$171
86.99
59.15
45.23
36.89
31.34
27.38
24.42
22.12
20.28

8.50%
$171
87.22
59.37
45.46
37.12
31.57
27.62
24.65
22.36
20.52

9.00%
$171
87.46
59.6
45.69
37.35
31.8
27.85
24.77
22.59
20.76

10.00%
$172
87.92
60.06
46.14
37.81
32.27
28.32
25.36
23.07
21.25

10.50%
$172
88.15
60.29
46.38
38.04
32.5
28.55
25.6
23.32
21.49

11.00%
$172
88.38
60.52
46.61
38.28
32.74
28.79
25.85
23.56
21.74

11.50%
$172
88.62
60.75
46.84
38.51
32.98
29.03
26.09
23.81
21.99

12.00%
$173
88.85
60.98
47.07
38.75
33.21
29.28
26.33
24.06
22.24

Calculating Rebate and Payoff for Rule of 78

Rule of 78 - A variation of the U. S. Rule. The Rule of 78
is not allowed for loans of 61 months or longer
Step 6. Calculate the payoff
Step 5. Calculate the rebate amount of the finance charge
Step 4. Set up the rebate fraction from Table 14.3
Step 3. Find the number of payments remaining
Step 2. Calculate the total finance charge
Step 1. Find the balance of the loan outstanding

14-13

Table 14.3 - Rebate Fraction Table

based on Rule of 78
Months
to go
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

14-14

Sum of
digits
1
3
6
10
15
21
28
36
45
55
66
78
91
105
120
136
153
171
190
210
231
253
276
300
325
351
378
406
435
465

Months
to go
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

Sum of
digits
496
528
561
595
630
666
703
741
780
820
861
903
946
990
1035
1081
1128
1176
1225
1275
1326
1378
1431
1485
1540
1596
1653
1711
1770
1830

60 Months

Paying Off Installment Loan before Due Date

What is the rebate of the finance charge and payoff
if the car loan were paid off after 27 months?
1. 60 x$ 194.38 = $11,662.80
- 27 x $194.38 = $ 5,248.26
Bal. Out.= $ 6,414.54
2. $11,662.80
- $ 9,045.00
$ 2,617.80 = Total fin. chr.
3. 60 - 27 = 33 Pymts. remaining
14-15

4. 561 - Sum of digits 33 mnths

1,830 - Sum of digits 60 mnths

5. 561 x $2,617.80 = $802.51

1,830
6. $6414.54 - $802.51 =
$5,612.03

Revolving Charge Credit Cards

Interest charges are based on
the interest rate times the
previous months balance
(outstanding balance)

Revolving charge account

- allows the buyer openend credit up to the
maximum credit limit.
14-16

Payments are first applied

towards interest and then the
outstanding balance (US
Rule)

Paying Just the Minimum, and Get Nowhere Fast

The cost in years and dollars-of paying the
minimum 2% of balances on credit cards charging
17% annual interest
Balance

Total Cost

Total Time

$1,000

$2,590.35

17 years, 3 months

$2,500

$7,733.49

30 years, 3 months

$5,000

$16,305.34

40 years, 2 months

Source: www.bankrate.com
14-17

Table 14.4 - Schedule of Payments

Monthly
payment
number

Outstanding
balance
due

1 1/2% interest
payment

$8,000.00

$120.00

Amount of
monthly
payment
$500

(.015 x $8,000)

$7,620.00

$114.30

$7,234.30

$108.51
(.015 x $7,234.30)

14-18

$380.00
($500 - $120)

$500

(.015 x $7,620)

Reduction in
balance due

$385.70

Outstanding
balance due
$7,620.00
($8,000 - 380)

$7,234.30

($500 - $114.30) ($7,620 - 385.70)

$500

$391.49

$6,842.81

($500 - $108.51) ($7,234.30-391.49)

Calculating Average Daily Balance

Step 5. Finance charge = Rate per month x
Average daily balance
Step 4. Divide the sum of the cumulative daily
balances by the number of days in the billing cycle.
Step 3. Add the cumulative balances.
Step 2. When the daily balance is the same for more than one day,
multiply it by the number of days the daily balance remained the
same or the number of days of the current balances.

Step 1. Calculate the daily balance or amount owed at the end of

each day during the billing cycle
Daily = Previous + Cash + Purchases - Payments
balance
balance advances
14-19

Calculating Average Daily Balance

6/20
6/27
6/30
7/9
7/12

14-20

30 - day billing cycle

Billing date Previous balance
Payment
Charge JCPenney
Payment
Cash advance

$450
$ 50cr.
200
40cr.
60

Calculating Average Daily Balance

Step 1

(7+3+9+2)

30-22

Days Current daily bal.

Extension

7
$450
3
400 ($450- $50)
9
600 ($400+$200)
3
560 ($600 - $40)
8
620 ($560 + $60)
30
Average daily balance =

Step 2
$3,150
1,200
5,400
1,680
4,960
Step 3
$16,390
Step 4
$16,390 = $546.33
30

Finance charge = $546.33 x .015 = $8.19

14-21

Step 5

Problem 14-10:
Solution:
$35,300
- 3,530 down payment
$31,770 loan amount

$31,770
$1,000

14-22

= $31.77 x 20.28 = $664.2956 = $644.30

Problem 14-12:
Solution:
a. Amount financed: $7,880 0
=$7,880
Selling
Down
Amount
=
price payment financed
b. Finance charge: ($185.53 x 60) - $7,880 = $3,251.80
C. APR by table lookup: $3,251.80 X $100 = $41.27
$7,880.00
Between 14.50% and 14.75%
d. Monthly payment by formula: $3,251.80 + $7,880.0 = $185.53
60

e. Monthly payment by table lookup (use 14.50%):

$7,880 = 7.88 $23.53 = $185.42
$1,000
14-23

Problem 14-17:
Solution:
First America Bank

U.S. Bank

$488.26 x 48 = $23,436.48
$497.70 x 48 = $23,889.60
- 20,000.00
- 20,000.00
$ 3,436.48 finance charge
$ 3,889.60 finance charge
$3,436.48 x $100 = $17.1824
$3,889.60 x $100 = $19.448
$20,000
$20,000
= Between 8.00% and 8.25%
= Between 8.75% and 9%

14-24

Problem 14-18:
Solution:
No. of days
Of current balance
6
5
7
4
6 (28 22)

14-25

Current
Balance
$ 800
740
990
970
1,170

Extension
$4,800
3,700
6,930
3,880
7,020
$26,330 28
= $940.35714

Problem 14-19:
Solution:
Monthly
Payment
Number
1

Outstanding
balance due
$500.00

1 %
Amount of
interest
monthly Reduction in
payment payment balance due
$7.50

$100.00

($500 x .015)

$407.50

$6.11

$92.50
($100.00 - $7.50)

$100.00

$93.89

Outstanding
Balance due

$407.50
($500 - $92.50)

$313.61

($407.50 x .015) ($100.00 - $6.11) ($407.50 - $93.89)

$313.61

$4.70

$100.00

$95.30

$218.31

($313.61 x .015) ($100.00 - $4.70) ($313.61 - $95.30)

14-26