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Learn about borrowing money for homes, cars, and more, including mortgage terms, auto loans, and credit card interest charges. Make informed financial decisions to save on interest costs.
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Bell Work: • The volume of a model car built to a 1:20 scale is what fraction of the volume of the car?
Answer: • 1/8000
It costs money to borrow money. Borrowing money to buy a home, a car, or even a jacket includes additional costs, and sometimes those additional costs are high. We will consider three situations.
Mortgage: • The money borrowed to buy a home is called a mortgage. If a person borrows $300,000 at about 7% fixed interest for 30 years, then the borrower makes equal monthly payments of about $2000. the monthly payment pays current interest and a small amount of the $300,000 principal. If the borrower continues to make the mortgage payment for 30 years (360 monthly payments) until the loan is repaid, then the sum of the payments will be about $720,000.
This total includes the original $300,000 loan plus about $420,000 in finance charges (interest, etc.) A 15-year loan repays the original loan in half the time and may have a lower interest rate, so the total finance charge is less. However, the monthly payments on a 15-year loan are higher (not twice as high but perhaps a third higher).
Auto Loans: • Auto loans are usually at a higher interest rate than home loans and are for a shorter duration, such as 36 months or 60 months. A person who borrows $20,000 for 36 months at 7.5% annual percentage rate (APR) pays about $622 per month. The interest paid totals about $2,400. Borrowing $20,000 at 7.5% for 60 months reduces the monthly payment to about $400 but increases the total interest paid to cover $4000.
Credit Card Interest: • Credit card companies offer a line of credit to consumers and require monthly payments for purchases made with the credit card. If the charges are paid in full each month, no interest is charged. If the charges are not paid in full then an interest charge is added to the bill at the end of the monthly billing cycle. The monthly charge is typically 1 ½ to 2% of the unpaid balance.
Example: • Jason has a credit card balance of $1200. the card company charges 2% interest on the unpaid balance each month. • What is the interest charge on Jason’s current balance? • Jason has a choice of paying the balance plus interest in full, or making a minimum payment of $50. if Jason makes only the minimum payment each month, what balance will he carry to the next month? • If Jason makes the minimum payment and makes an additional $800 in purchases during the next month, what will Jason’s approximate balance after the next month’s interest is applied?
Answer: • .02 x $1200 = $24.00 • $1224 - $50 = $1174 • $1174 + $800 + interest • .02 x 1174 = $23.48 • .02 x 800 = $16.00 • 1174 + 800 + 40 = $2014
Example: • Two families repaid their 30-year $300,000 mortgages. One loan was repaid at about $1800 per month at 6%, and the other at about $2000 per month at 7%. What is the difference in interest charges over the life of the loans?
Answer: • $2000 - $1800 = $200 • $200 x 360 months = $72,000