Learning to Give, Philanthropy education resources that teach giving and civic engagement

Installment Credit
Lesson 3:
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Academic Standards
Philanthropy Framework

Purpose:

The purpose of this lesson is for students to understand the interest formula, how installment credit works, and the types of items that might be purchased using installment credit.

Duration:

Three Fifty to Fifty-five Minute Class Periods

Objectives:

The learner will :

  • calculate interest on installment loans.
  • calculate monthly payments on installment loans.
  • evaluate alternative financing options and make positive decisions.
     

Materials:

  • Misc. construction paper, scissors, markers, etc.
  • An assortment of car and house magazines
  • Learner copies of Buying on the Installment Plan (Attachment One)
  • Learner copies of Installment Math Problems (Attachment Two). 
  • Instructor copy of Lecture Notes:Purchasing that "Dream" Car (Attachment Three) 
  • Assorted auto sales magazines (minimum of one for every two learners)
  • Learner copies of Financing a Car Overhead (Attachment Four)
  • Slips of paper with dollar amounts ranging from $75 to $215 (Minimum of one slip of paper bearing an amount for every two learners
  • Learner copies of Financing a Car Assignment (Attachment Five).
  • Instructor copy of Lecture Notes: Purchasing that Dream House (Attachment Six) 
  • Assorted real estate monthly sales magazines (minimum of one for every two learners).  
  • Learner copies of Financing a House Overhead (Attachment Seven)
  • Slips of paper with dollar amounts ranging from $350-$1,000 (Minimum of one slip of paper bearing an amount for every two learners
  • Learner copies of Financing a House Assignment (Attachment Eight)
  • Completed learner copies of My Future Money Pie Chart at 55 Years of Age-Homework (Attachment Five -from Lesson One)
  • Learner copies of My Future Money Pie Chart at 55 Years of Age Revisited (Attachment Nine)
Handout 1
Buying on the Installment Plan
Handout 2
Installment Math Problems
Handout 3
Lecture Notes: Buying that Dream Car
Handout 4
Financing a Car Overhead
Handout 5
Financing a Car Assignment
Handout 6
Lecture Notes: Purchasing that Dream House
Handout 7
Financing a House Overhead
Handout 8
Financing a House Assignment
Handout 9
My Future Money Pie Chart at 55 Years of Age Revisited

Instructional Procedure(s):

Anticipatory Set: 
As the learners are entering the classroom, be busily looking through car magazines and/or a house magazines. When everyone is seated, holding the magazine in such a way that the learners will be able to see what you are looking at, ask them if they've every given any thought about their dream car or their dream home. After a number of ideas have been shared, ask if they think at some time in the future, they believe that they will be able to buy either their dream house or car with cash? With credit?  And is there much of a difference how one goes about buying with cash or credit? Have them share the reasons that they believe as they do.

  • Share the information on Buying on the Installment Plan (Attachment One), the interest formula (I=PRT) and demonstrate an installment credit math problem.
     
  • Place the learners in groups of three, distribute and assign each group the Installment Math Problems (Attachment Two).  The students will work together as a group to solve the problems.  Tell them that they will not only need to find the correct solutions to the various problems, but they will need to make a determination as to whether or not they think it is a good idea for those involved to finance their purchases in this manner, giving rationale for their decision.

  • Share the information on Lecture Notes: Purchasing that "Dream" Car (Attachment Three).

  • Pair up the learners and distribute an auto sales magazines (These local magazines, can easily be obtained for free at news stands). Ask each group to select a 'dream' car.

  • Using one of the 'dream' cars as an example model an installment credit problem for the class Financing a Car Overhead (Attachment Four).

  • Have each paired group draw a slip of paper with a dollar amount on it from a container.  Tell them that this is the amount they have  'budgeted' to spend on their monthly car payments.  Have them find two or three cars in the auto sales magazines that they would be able to purchase and compute the financing for each car using the Financing a Car Assignment (Attachment Five).

  • Have each group draw a replica of their favorite selected 'dream' car for display listing somewhere on the car its year, name, make/model and the total  amount of money it will ultimately cost if financed over 3, 4, or 5 years period given its 'asking' price and their budgeted allocated monthly car payment.

  • Share the information on Lecture Notes: Purchasing that "Dream" House (Attachment Six).

  • Pair up the learners and distribute a real estate monthly sales magazine (These local magazines can easily be obtained for free at news stands). Ask each group to select a 'dream' house.

  • Using one of the 'dream houses' as an example, model an installment credit problem for the class Financing a House Overhead (Attachment Seven).

  • Have each paired group draw a slip of paper with a dollar amount on it from a container.  Tell them that is the amount they have 'budgeted' to spend on their monthly house payments.  Have them find two or three houses in the real estate monthly sales magazines that they would be able to purchase and compute the financing for them using the Financing a House Assignment (Attachment Eight).

  • Have each group draw a replica of their of favorite house for display and list the total cost of the house given the interest rate being charged over the 30 year payment period.

  • Distribute copies of the My Future Money Pie Chart at 55 Years of Age Revisited (Attachment Nine) and tell the learners to re-draw their anticipated uses of money reflected on their original My Future Money Pie Chart at 55 Years of Age (Attachment Five - Lesson One), if at that time they were to find themselves to be "overextended" with credit payments equal to $ 50,000 annually.

  • In writing, have the learners compare the original My Future Money Pie Chart at 55 Years of Age-Homework (Attachment Five - Lesson One) proportions with the one they just drew My Future Money Pie Chart at 55 Years of Age Revisited (Attachment Nine)-and respond in writing to these prompts: "How do these proportions of the four possible money usages compare with that of your original drawing? What impact might debt have on Saving, Spending, Investing, and Donating? In what ways might avoiding the abuse of credit be considered a civic virtue and someone who avoids abusing credit be considered a good citizen?

Assessment:

An evaluation of the learner's understanding of mathematical computation called for in these assignments as well as his/her contributions to classroom discussion and the depth of thought and understanding evident in the reflection assignment will form the basis for the assessment of these lessons.  

Cross-Curriculum Extensions:

None for this lesson

Bibliographical References:

Lesson Developed By:

Sharon Lutz-Krebill
Tri County Area Schools
Tri County High School
Howard City, MI 49329

Handouts:

Handout 1Print Handout 1

Buying on the Installment Plan

Interest Formula

Interest = Principal x Interest Rate x Time (in years)

Example 1: Arthur wants to buy an entertainment center. The cash price is $2850. It can also be purchased in 24 monthly payments of $140 each, with a down payment of $250. How much interest would he pay if he purchased the item on the installment plan? 

Total price  = Down payment + Monthly payment total
                     = $250 + (24 x $140)
                     = $3610

Interest        = Total amount paid – Cash price

                     = $3610 – $2850
                     = $760
 
Example 2: Find the interest rate?
 
Principal      = Full installment price – Down payment
                     = $3610 – $250
                     = $3360
 
Interest Rate       = Interest / Principal x Time
                             = $760 / $3360 x 2
                             = 11.3%

Handout 2Print Handout 2

Installment Math Problems

 

  1. Clare wants to buy a used wide-screen TV that sells for $2,000 cash. She will make a down payment of $1,000 and then six monthly payments of $200. What is the full installment price and the annual interest rate?

     
  2. Lauren has his heart set on a new GPS that will cost him $325 if he pays cash and $400 if he pays by installments. If the down payment is $50, how much will he pay in each of 12 monthly payments? What is the annual interest rate on this purchase?

     
  3. Jake is looking to buy a used car that will cost him $10,000. He will make a down payment of $5,000 and then twenty-four payments of $225. What is the full installment price and the annual interest rate?

     
  4. Vanessa wants to buy a new sewing machine that sells for $2,000 cash. She plans to make a down payment of $1000 and then twelve monthly payments of $95. What is the full installment price and the annual interest rate?

     
  5. Armando's motorcycle needs a new motor. It will cost him $700 if he pays cash and $825 if he pays by installments. If the down payment is $275 on the motor, how much will he pay in each of 12 monthly payments? What is the annual interest rate on this purchase?

     
  6. The Sharps want to finance a cruise to Alaska for $2,800. The offer is for no money down with twenty-four payments of $150. What is the full installment price and the annual interest rate?

     
  7. Ana is moving into her own apartment and wants to purchasing a Home Entertainment Center. The cost of the HEC is $1,350 if paid in cash and $1,495 if she pays in installments. If the down payment is $450, how many months will it take her to pay off the installment loan if she pays $44 per month?
 
Answers:
1) Total=2200
Interest= 10%
1000+(200x6)= 2200
2200-2000=200 in interest(
200/2000)x100=10% interest rate
 
2) 400-50=350
350/12=29.167 a month
(75/325)x100=23.077% interest rate
 
3) 10000-5000=5000
225x24=5400  full installment price
5000-5400=400
(400/5000)x100=8% interest rate
 
4) 2000-1000=1000
95x12=1140
1140-1000=140
(140/1000)x100=14% interest rate
 
5) 825-275=650
650/12=54.167 a month
(125/650)=19% interest rate
 
6) 24x150=3600 full installment
3600-2800=800
(800/2800)x100=28.57%
 
7)1495-450=1045
1045/44=23.75 aka 24 months

Handout 3Print Handout 3

Lecture Notes: Buying that Dream Car

Before you SHOP

  • Research cars and options
  • Look at insurance, maintenance, and gas prices
  • Decide how much you want to spend
  • Consider what to do with your old vehicle (if you have one)
 

Before you BUY

  • Take it for a test drive
  • Visit more than one dealer
  • Compare financing options
  • Establish cost before negotiating on trade-in
  • Try selling your old car yourself
  • Consider an extended service contract
  • If purchasing a used car– have car inspected by a trusted mechanic


Financing

Acceptance based on credit record

I=PRT
 
Note:

  • When computing interest, time is in years
  • When determining monthly payments, divide by months

Handout 4Print Handout 4

Financing a Car Overhead

Financing a Car

 
3 Years
4 Years
5 Years
Loan Amount
 
 
 
 
Interest Rate
9%
9%
9%
Interest
 
 
 
 
Total Cost
 
 
 
 
Number of Months
 
 
 
Monthly Payment
 
 
 

 

 

Handout 5Print Handout 5

Financing a Car Assignment

 
 
 
 
 
Length of Loan
3 Years
4 Years
5 Years
Advertised Price of Vehicle
 
 
 
 
Interest Rate
9%
9%
9%
Amount of Interest
 
  
 
Total Cost
 
 
 
 
Monthly Payment
 
 
 
   
 
 
Length of Loan
3 Years
4 Years
5 Years
Advertised Price of Vehicle
 
 
 
 
Interest Rate
9%
9%
9%
Amount of Interest
 
 
 
Total Cost
 
 
 
 
Monthly Payment
 
 
 
 
 
Length of Loan
3 Years
4 Years
5 Years
Advertised Price of Vehicle
 
 
 
 
Interest Rate
9%
9%
9%
Amount of Interest
 
 
 
Total Cost
 
 
 
 
Monthly Payment
 
 
 
 

Below… (1) Attach the slip that you drew. (2) Attach the three car ads you found. (3) Write which car and financing option you would choose and why.



 

Use the examples given to compute the down payment required to purchase the following vehicles:

 
Vehicle                  Price           15% Down Payment      20% Down Payment
 
1. Car                   $13,000                ____________              ____________
         
2. SUV                 $23,000                ____________              ____________
         
3. Truck                $18,500                ____________              ____________
 
Compute the following

4.         Cost of Vehicle: $14,000                                Total Interest:

APR: 9%                                                         Total Loan Amount:

Duration of Loan: 5 years                               Monthly Payment:
Down payment: 10%
 

5.         Cost of Vehicle: $5000                                   Total Interest:

APR: 4.5%                                                      Total Loan Amount:

Duration of Loan: 3 years                               Monthly Payment:
Down payment: 25%
 

6.         Cost of Vehicle: $12000                                 Total Interest:

APR: 5%                                                         Total Loan Amount:

Duration of Loan: 4 years                               Monthly Payment:
Down payment: $2000
 

7.         Cost of Vehicle: $7000                                   Total Interest:

APR: 7%                                                         Total Loan Amount:

Duration of Loan: 5 years                               Monthly Payment:
Down payment: $3000
 

8.         Cost of Vehicle: $16000                                 Total Interest:

APR: 11%                                                       Total Loan Amount:

Duration of Loan: 3 years                               Monthly Payment:
Down payment: $2000
 

9.         Cost of Vehicle: $16000                                 Total Interest:

APR: 11%                                                       Total Loan Amount:

Duration of Loan: 3 years                               Monthly Payment:
Down payment: $4000
 

10.       If you double the down payment what happens to the total cost and payment of the vehicle? What two ways can you lower your monthly payment?

 

Answers:

1. Car—15%  $1950                               --20% $2600
2. SUV—15% $3450                              --20% $4600
3. Truck—15% $2775                           --20% $3700
 
4.
Total interest: $3,093.60
Loan amount $12,600
Monthly payment $261.56
5.
Total interest: $265.80
Loan amount $3750
Monthly payment $111.55
6.
Total interest: $1,053.92
Loan amount $10,000
Monthly payment $230.29
7.
Total interest: $752
Loan amount $4,000
Monthly payment $79.20
8.
Total interest: $2,500.25
Loan amount $14,000
Monthly payment $458.34
9.
Total interest: $2,142.96
Loan amount $12,000
Monthly payment $392.86
10.
Doubling the down payment lowers the loan amount and monthly payment and decreases the overall cost of the purchase. You can lower the payment by increasing the down payment or by extending the number of years for repayment.

Handout 6Print Handout 6

Lecture Notes: Purchasing that Dream House

Qualifying for a Home Mortgage
 
Mortgage acceptance is based on your credit record
Amount of money is based on income, down payment, & interest rates
 

Types of Home Mortgages
 
Fixed-Rate Mortgages
  • Conventional 15, 20, 25, 30 year – same payment
  • FHA/VA – available for special populations
  • “Balloon” – fixed for 3-10 years, then balance is due
 
Adjustable-Rate Mortgages

  • Traditional ARM – payments vary with interest rates
  • Graduated-payment – fixed a year at a time - payments begin small and increase with time
  • Growing-equity – payment increase applies to principal
 

Other Financing Methods
Second mortgage/home equity loan – borrowing against the equity in your house
Reverse mortgage – bank buys a home you own by making payments
Refinancing – taking out a new “cheap” mortgage to pay off an old “expensive” mortgage

Handout 7Print Handout 7

Financing a House Overhead

Mortgage Example   
   
 
30 Years
30 Years
30 Years
30 Years
Price of House
 
 
 
 
 
Interest Rate
6%
9%
12%
15%
Payment per $1,000
 
 
 
 
Total Payment
 
 
 
 
 
Total Cost of House
 
 
 
 

How much would you have to make each month to afford this house? (30%)

 
 
 
 
 
 
 

Handout 8Print Handout 8

Financing a House Assignment

Duration
30 Years
30 Years
30 Years
30 Years
Price of House
 
 
 
 
 
Interest Rate
6%
9%
12%
15%

Payment per $1,000 (chart)

 
 
 
 
Total Monthly Payment
 
 
 
 
Total Cost of House
 
 
 
 

 
 

Duration
30 Years
30 Years
30 Years
30 Years
Price of House
 
 
 
 
 
Interest Rate
6%
9%
12%
15%

Payment per $1,000 (chart)

 
 
 
 
Total Monthly Payment
 
 
 
 
Total Cost of House
 
 
 
 

 

Duration
30 Years
30 Years
30 Years
30 Years
Price of House
 
 
 
 
 
Interest Rate
6%
9%
12%
15%

Payment per $1,000 (chart)

 
 
 
 
Total Monthly Payment
 
 
 
 
Total Cost of House
 
 
 
 

 

Below… (1) Attach the slip that you drew. (2) Attach the three houses that you found. (3) Write which house you would choose and why.

 

Compute the following:
 
  1. (a) A 15-year mortgage at 8 percent for a $100,000 house. (b) How much are you really paying for the house?
 
 
 
  1. (a) A 30-year mortgage at 6.5 percent for a $200,000 house. (b) How much are you really paying for the house?
 
 
 
  1. (a) A 25-year mortgage at 9 percent for a $150,000 house. (b) How much are you really paying for the house?
 

Now consider a loan for $125,000 at 7% interest. Compute the monthly payment and total cost for a 15, 20, 25, and 30-year loan.

 
 What is the difference between the 15 and 30-year loans?

Duraton Monthly Payment Total Cost        
15 years    
20 years    
25 years    
30 years    
 

Use the same information as above to fill out the next table. The only exception is the interest rate. It is now 8%. 


Duraton
Monthly Payment
Total Cost        
15 years

 

 
20 years

 

 
25 years
 
 

30 years
 
 

How much does one percentage point affect the total amount that you pay for a 25 year mortgage?

Handout 9Print Handout 9

My Future Money Pie Chart at 55 Years of Age Revisited


 
Divide the pie chart into four pieces, the size of each piece representing the portion of the money you think you will  spend, save, invest, and donate when you are 55 years old.

Note: The entire pie represents your total earnings in one year, after taxes. Label the pieces with an SP for Spend; SV for Save; IV for Invest; and DO for Donate.









 

 

Reflection: Complete this portion of the assignment on a separate piece of paper to be handed in.

 
"When I consider “wants” and “needs” from an economical perspective and think about how I am using my money now and how I might be using it in the future for Spending, Saving, Investing, and Donating, I notice that /I think that ... "







 

Philanthropy Framework:

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Unit Contents:

Overview:Using and Abusing Credit Summary

Lessons:

1.
Where Does All the Money Go?
2.
Credit Introduction
3.
Installment Credit
4.
Credit Cards

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