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Unit 5
Example Problem 1. Carol bought a car for $19,500 by making a $2,500 down payment and financing the rest
at $490 per month for 42 months.
a.
What is the Installment Price?
Answer:
Total Installment payment = 42 x $490 = $20,580
Installment Price = $20,580+ $2500 = $23,080
b.
What is the financial charge and amount financed?
Answer:
Finance charge = $23,080 - $19,500 = $3,580
Amount financed = $19,500 - $2,500 = $17,000
Example Problem 2. At the beginning of October Quinetta’s credit card had an unpaid balance of $3,200.
During the October billing cycle she made a payment of $280 and used the card to purchase $110 worth of
clothing. The credit card charges a 21% annual percentage rate and uses the unpaid balance method.
What is the finance charge at the end of October?
Answer:
Monthly interest rate = 0.21 / 12 = 0.0175
To find the finance charge for the month of we multiply the beginning unpaid balance by the monthly interest
rate. Finance charge = $3,200 * 0.0175 = $56
What is the new balance at the end of October?
Answer:
New balance at the end of October = Previous month’s unpaid balance + Finance charge + Purchases and cash
advances – Payments and credits
New balance at the end of October = $3,200 + $56 + $110 - $280
New balance at the end of October = $3086
Example Problem
Maria has a credit card. She had a beginning balance on the card of $500 for May (May 1 through May 31).
She paid $200 on May 9, charged purchases of $50 on May 11, $100 on May 18, and $40 on May 29. Her
Annual Percentage Rate (APR) on the credit card is 19% of the unpaid balance, and interest is charged using the
average daily balance method, including current purchases.
Find the unpaid balance for the May statement (before interest was charged).
Date
Transaction
Amount Balance
May 1
Beginning Balance $500
$500
May 9
Payment
($200)
$300
May 11 Purchase
$50
$350
May 18 Purchase
$110
$460
May 29 Purchase
$45
$505
Answer:
Balance at the end of May is $505
Find the average daily balance for the month of May (assume 31 days).
Dates
# of days Balance Partial Sum
May 1-8
8 days
$500
8($500) = $4,000
May 9-10
2 days
$300
2($300) = $600
May 11-17
7 days
$350
7($350) = $2,450
May 18-28
11 days
$460
11($460) = $5,060
May 29-31
3 days
$505
3($505) = $1,515
Totals
31 days
Answer:
Sum: $13,625
Average Daily Balance = Total Sum/Total Days = $13,625/31 = $439.52
Average Daily Balance is $439.52
Calculate how much interest Maria must pay in addition to the minimum payment.
Answer:
Finance Charge = Average Daily Balance * Interest Rate
Interest = $439.52 * (0.19/12) = $6.96