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Consumer Science 275

Homework #2

Topic:  The Cost of Credit

IMPORTANT: ROUND TO 2 DECIMAL POINTS FOR YOUR ANSWERS. Use negatives as you did in HW 1.

Showing your work (math) may provide you with partial credit if your answer is incorrect. Show all variables for the TVM calculations.

All questions are worth 5 points unless otherwise noted.

FICO/Credit Scores → Score       Percentage

                                < 500         12.00%

                                501-600      10.00%

                                601-700       8.00%

                                701-800       5.00%

                               >800            4.00%

1.  Good Deal Credit Union is offering a $15,000 4-year loan with the APRs determined by your FICO credit score. Assume your credit score is 710. How much would your monthly payment be? Please fill in the boxes below:

2.  What will you pay in total interest over the life of the loan? (Based on the answer above, round to the nearest cent to calculate this answer)

3.  How much more would you have to pay a month if your FICO score was 100 points lower?

You would pay: $____20.75____ more per month.

4.  How much more over the life of the loan did the scenario in #3 cost you over the scenario in #1? (You’re looking at the amount of interest you’re paying for each scenario & what the difference is)

Amount of interest (#3)

366.19 x 48 = 17577.12 à 17577.12 – 15000 = 2577.12

2577.12 – 1581.12 = 996

Consumer Loans

Scenario 1: Tom has a 30-year home mortgage of $300,000 at an APR of 3.2%. He has a $17,000, 3-year car loan with an APR of 4.35%. Use your financial calculator.

5. How much is his monthly mortgage payment?

6.  What will be his total payments for the life of his $300,000 mortgage?

Total payments=1297.40 x 30 x 12 = 467064.00

7.  How much is his monthly car payment? Please fill in the boxes below:

8.  What will be his total payments be for his $17,000 car loan?

Total payments=504.56 x 3 x 12 = 18164.16

Scenario 2: Assume you have a credit card with a balance of $7,560 that you want to pay off in 36 months.  The interest rate is 11.6%.

9. What is the monthly amount needed to pay off this credit card assuming no more purchases and no annual fee?

10.  What if you could only pay $150 a month on this card—approximately how many months would it take to pay it off? (Still round to 2 decimal places)

Scenario 3: Assume you go to buy a $22,000 car and are offered the following deals. For both deals you have $5,000 of your own money you can apply towards your new car (down payment).

a. $1,000 immediate cash back (which can be added to your down payment) and 6.3% interest over 4 years

Or

b. 5.5% interest with no cash-back over 4 years

11.  What is the monthly payment for the ‘cash back’ offer?

12. What is the monthly payment for the 5.5% offer?

13. Which is the better deal (costs you less) and by how much over the life of the loans? Show the math.

Total payment for A = 377.97x48= 18142.56

Total payment for B = 395.36x48= 18977.28

18977.28 – 18142.56 = 834.72

Option A is a better deal by $834.72

Scenario 4: Terence and Bradley are both buying new homes. Each of their homes are being purchased for $375,000 and each are putting down 20%.

· Terence is getting a 30-year mortgage for 5.2%

· Bradley’s 30-year mortgage is 4.6%

14. What is Terence’s monthly payment?

15. What is Bradley’s monthly payment?

16. How much interest will Terence pay over the life of the loan?

Total payments = 1647.33 x 360 = 593038.80

Total interest = 593038.80 – 300000 = $293038.80

17. How much interest will Bradley pay over the life of the loan?

Total payments = 1537.93 x 360 = 553654.80

Total interest = 553654.80 – 300000 = $253654.80

18. What is the difference in total interest payments between Terence & Bradley?

293038.80 – 253654.80 = 39384.00

19. Please provide two ideas that Terence can use to help lower his interest rate. (10 pts)

1) Terence can improve his credit score to lower his interest rate. He can pay bills on time and avoid new debts.

2) Terence can shop around and compare offers from different lenders. He will be able to find a mortgage with a more competitive interest rate that suit his financial situation.