Do the Math #1: Monthly Payments and Finance Charges

Kimberly Jensen and Rebecca Parker of Mankato, Minnesota, 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 $2,800, with no down payment required. Using Table 7-1 or the Garman/Forgue companion website, 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?

Do the Math #5: Rule of 78s. Aaron Carson of Hays, Kansas, obtained a two-year installment loan for $1,500 to buy some furniture eight months ago. The loan had a 12.6 percent APR and a finance charge of $204.72. His monthly payment is $71.03. Aaron has made eight monthly payments and now wants to pay off the remainder of the loan. The lender will use the Rule of 78s method to calculate a prepayment penalty.

• a) How much will Aaron need to give the lender to pay off the loan?
• b) What is the dollar amount of the prepayment penalty on this loan?