10.4 Installment Buying 615 In Section 10.2, we discussed personal notes and discounted notes. When borrowing money by either of these methods, the borrower normally repays the loan as a single payment at the end of the specified time period. There may be circumstances under which it is more convenient for the borrower to repay the loan on a weekly or monthly basis or to use some other convenient time period. One method of doing so is to borrow money on an installment plan. There are two types of installment loans: fixed payment and open-end. A fixed installment loan is one on which you pay a fixed amount of money for a set number of payments. Examples of items purchased with fixed-payment installment loans are college tuition loans and loans for cars, boats, appliances, and furniture. These loans are generally repaid in 24, 36, 48, or 60 equal monthly payments. An open-end installment loan is a loan on which you can make variable payments each month. Credit cards, such as MasterCard, Visa, Discover, and some American Express cards are actually open-end installment loans, used to purchase items such as clothing, textbooks, and meals. Credit Rating Services give any individual wishing to borrow money or purchase goods or services on an installment plan a credit rating . The lenders use this credit rating to determine if the borrower is likely to repay the loan. The lending institution determines whether the applicant is a good “credit risk” by examining the individual’s income, assets, liabilities, and history of repaying debts. Your friends are planning a trip for spring break, and you would like to join them. Although you don’t have enough money to pay for the trip, you do have a credit card. You must make an important decision. Do you charge the trip to your credit card and worry about paying for it later, or do you decide you can’t afford the trip and choose not to go? In this section, we will look at the real cost of using a credit card to make purchases. We will also study other common types of loans frequently used to purchase big-ticket items such as cars, appliances, home improvements, and vacations. Installment Buying SECTION 10.4 LEARNING GOALS Upon completion of this section, you will be able to: 7 Solve problems involving fixed installment loans. 7 Solve problems involving open-ended installment loans. Why This Is Important An important part of financial literacy is understanding the cost of borrowing money to make purchases. Installment loans and credit cards are two very common ways to borrow money for making such purchases. In order to make sound financial decisions, it is important to understand the costs involved with obtaining a loan and using a credit card. 49. Determining the Interest Rate Richard borrowed $2000 from Linda. The terms of the loan are as follows: The period of the loan is 3 years, and the rate of interest is 8% compounded semiannually. What rate of simple interest would be equivalent to the rate Linda charged Richard? 8.84% Research Activities 50. Certificate of Deposit Imagine you have $4000 to invest and you need this money to grow to $5000 by investing in a CD. Contact a local bank or credit union to obtain the following CD information: the interest rate, the length of the term, and the number of times per year the CD is compounded. Determine how long it would take you to reach your goal with the institution selected. Write a report summarizing your findings. 51. History of Interest Write a paper on the history of simple interest and compound interest. Answer the questions: When was simple interest first charged on loans? When was compound interest first given on investments? YanLev/Shutterstock
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