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Business: The Cost of Credit

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Chapter 31: The Cost of Credit

Page 430: 1-7 & 11-17

1. What three things must you know to be able to calculate interest? What is the simple interest formula?

Rate, Principal, and Time Factor

I = P x R x T

2. In calculating interest, how many days are normally considered to be in one year?

360 (to make it an easy calculation)

3. How is the maturity date of a loan determined?

When it's given in moths, it's the date of the same day of the different month. When it's given in days, it's the number of days since the loan was made.

4. What is the difference between a decreasing payment and a level payment installment loan?

A level payment installment loan makes you pay an equal amount each moth, while a decreasing payment is when you paid an amount per month, plus a certain interest on the remaining balance.

5. What are some costs that can be included in a finance charge?

Interest, service fees, etc.

6. By law, what information must be disclosed by creditors to make it easier for a consumer to compare finance charges?

ARP (Annual Percentage Rate)

7. List some things you need to consider when making a decision about obtaining a loan or using an installment sales contract.

Whether an installment loan from a financial institution may be cheaper, where to buy the cheapest, what the annual percentage rate is, the amount of

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