Simple Interest Installment Loans

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simple interest installment loan (p. 290)

A loan repaid with equal monthly payments.

annual percentage rate (p. 290)

An index showing the cost of borrowing money on a yearly basis, expressed as a percent.

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Monthly Payment =

Amount of Loan ÷ $100 × Monthly Payments for a $100 Loan

Formula 1Formula 1

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Total Amount Repaid =

Number of Payments × Monthly Payments

Formula 2Formula 2

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Finance Charge = Total Amount Repaid – Amount Financed

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Carol Ina obtained an installment loan of $1,800.00 to purchase some new furniture. The annual percentage rate is 8 percent. She must repay the loan in 18 months.

What is the finance charge?

Example 1Example 1

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Find the monthly payment.

Amount of Loan ÷ $100 × Monthly Payments for a $100 Loan

$1,800.00 ÷ $100.00 × $5.91 = $106.38

Example 1 Answer: Example 1 Answer: Step 1Step 1

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Find the total amount repaid.

Number of Payments × Monthly Payment

18 × $106.38 = $1,914.84

Example 1 Answer: Example 1 Answer: Step 2Step 2

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Find the finance charge.

Total Amount Repaid – Amount Financed

$1,914.84 – $1,800.00 = $114.84

Example 1 Answer: Example 1 Answer: Step 3Step 3

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Fulio and Julio Fernandez purchase a refrigerator with an installment loan that has an APR of 12 percent. The refrigerator sells for $1,399.99. The store financing requires a 10 percent down payment and 12 monthly payments.

What is the finance charge?

Example 2Example 2

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Find the amount financed.

Selling Price – Down Payment

$1,399.99 – (0.10 × $1,399.99)

$1,399.99 – $140.00 = $1,259.99

Example 2 Answer: Example 2 Answer: Step 1Step 1

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Find the monthly payment. (Refer to the Monthly Payment on a Simple Interest Installment Loan of $100 on page 799 in your textbook).

Amount of Loan ÷ $100 × Monthly Payment for a $100 Loan

$1,259.99 ÷ $100.00 × $8.88 = $111.887 or $111.89

Example 2 Answer: Example 2 Answer: Step 2Step 2

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Find the total amount repaid.

Number of Payments × Monthly Payment

12 × $111.89 = $1,342.68

Example 2 Answer: Example 2 Answer: Step 3Step 3

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Copyright © Glencoe/McGraw-Hill MBA, Section 8-3, Slide 14 of 20

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Find the finance charge.

Total Amount Repaid – Amount Financed

$1,342.68 – $1,259.99 = $82.69

Example 2 Answer: Example 2 Answer: Step 4Step 4

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