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Section 4.2 Loans (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: Another person who agrees to pay back the loan if the borrower is unable to do so. Life Insurance: Sometimes required, in the event the borrower dies before loan is paid off Wage Assignment: Voluntary deduction from your paycheck to pay off the loan Loans (4.2) Some Key Terms: Wage Garnishment: Involuntary form of wage assignment Balloon Payment: The last payments can be higher than the previous. These are called balloon payments. Loans (4.2) Where can you go to take out a loan? o o o o o Banks Credit Unions Consumer Finance Companies Life Insurance Companies 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 5 Monthly Payment = $122.65 How much would this cost for 4 years? ($102)(48) = $5,887.20 Loans (4.2) Page 185, 2-8 Loans (4.2) Many students asked about “student loans” on the midterm. Quick video from youtube on student loans: Section 4.2 Loans (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 Section 4.2 Loans (4.2) 2) Arrange the following in descending order: 9 ½ %, 9%, 3 9 8 %, 9.45%, 9 9 % 16 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: 12 P 1+ 12 12 M= 12 1+ −1 12 M = Monthly Payment r = Interest Rate P = Principal t = Number of Years 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? 0.0512 0.0512 28,716 1+ 12 12 M= 0.0512 12 ∙4 1+ −1 12 12 ∙ 4 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? 150.302762 M= = $662.87 0.226745015 Loans (4.2) 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? 0.0931 0.0931 12 ∙3.5 8,700 1+ 12 12 M= 0.0931 12 ∙ 3.5 1+ −1 12 Loans (4.2) 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? 93.38054573 M= = $243.52 0.383466732 Loans (4.2) 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%.