Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 17

Make a list of all of the items that you have bought on an installment loan. Make another list of things you plan to buy in the next 2 years on an installment loan. (See Objective.)
Define installment loan. A loan is amortized if both principal and interest are paid off by a sequence of equal periodic payments. This type of loan is called an installment loan. People use installment loans for cars, boats, home improvements, and even for consolidating several loans into one affordable loan. Firms use installment loans to purchase equipment, computers, vehicles, mining equipment, etc. The graphic shows the total interest that must be paid when financing a new Ford Escape over 3, 4, and 5 years. Notice that financing the SUV over 5 years results in interest costs of $2600, thereby increasing the total cost of the $25,000 loan to $27,600 or by 10.4%.

Quick TIP
The interest rates on installments loans can be very high.
Notice that the total interest paid is much higher the longer the term of the loan. It may be difficult to make the higher payments of a short-term loan, but it results in less total interest!
The federal Truth in Lending Act (Regulation Z) of 1969 requires lenders to disclose their finance charge (the charge for credit) and annual percentage rate (APR) on installment loans. The federal government does not regulate rates. Each individual state sets the maximum allowable rates and charges.
The interest rate that is stated (in the newspaper, a marketing brochure, or a problem in a textbook) is also called the nominal rate. The nominal or stated rate can differ from the annual percentage rate or APR, which is based on the actual amount received by the borrower. The APR is the true effective annual interest rate for a loan. Information on two loans of $1000 each is shown below. An advertisement indicates a rate of 10, for each loan, and the actual interest is $100 for each. However, the terms differ as do the APRs.

The interest rates on these two loans are very different. In fact, interest rate charges vary a surprising amount from one lender to another, so it pays to shop around for the lowest APR. Furthermore, institutions usually charge a much higher interest rate for individuals with poor credit history. Thus, it is worth it to maintain a good credit history by paying all bills on time.