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Truth in Lending

Truth in Lending. Ch 14.3. Truth in Lending Act - 1968. This law was to help consumers protect their credit It did 2 main things: Made all banks use APR so consumers would be able to compare interests rates and know how much they were being charged each year

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Truth in Lending

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  1. Truth in Lending Ch 14.3

  2. Truth in Lending Act - 1968 • This law was to help consumers protect their credit • It did 2 main things: • Made all banks use APR so consumers would be able to compare interests rates and know how much they were being charged each year • Let borrowers pay off closed-end loans early and not pay as much in interest

  3. Find the monthly payment

  4. APR – Annual Percentage Rate • This tells you how much you are charged for interest in a year. • The problem became when different banks described interest in different ways • How would you know which is better: 1.5% per month or 9% per year? • APR has to be disclosed by any institution so you can compare with other places

  5. Finding APR • The formula is too complicated, so there is a table that we will use on page 883 in your book • APR = true annual interest • n = total number of monthly payments • h = finance charge per $100 of amount financed

  6. Find the true annual interest rate

  7. Find the APR

  8. Homework P. 887 #1 - 12

  9. Unearned Interest • When you pay a loan off early, you don’t pay all the interest – this is the unearned interest • Most lenders use the actuarial method • You do not get all of the unearned interest back because lenders charge an early payment penalty • This must be disclosed at the time of signing for the loan

  10. Unearned Interest – Actuarial Method • For a closed-end loan that is paid off early, let R = regular monthly payments k = remaining number of scheduled payments (after the current payment) h = finance charge per $100 corresponding to the APR and the k remaining payments Unearned interest, u = kR(h/(100+h))

  11. Payoff Amount • After you figure out the unearned interest, you can find the payoff amount – assuming no penalty charge: Payoff Amount = (k + 1)R – u

  12. a) Find the unearned interestb) Find the payoff amount

  13. Find the APR You have purchased $7000 of merchandise. You have agreed to a loan for 2 ½ years at 6.75%. Find the finance charge and the APR of the loan.

  14. Find the APR After a down payment on your new car, you still owe $7454. You repay the loan in 48 monthly payments of $185 each. Find the finance charge. What is the APR of the loan?

  15. Which is the better deal? You have the option of one of two loans for $7,000. You can borrow it from your bank at 7% add-on interest for 4 years or you can make 48 monthly payments of $190.

  16. Suppose you get a raise and want to pay off your car loan. It was a 4 year loan and you want to pay it off after 3 years. Your monthly payment is $185 with an APR of 9%. • Find the unearned interest. • Find the payoff amount.

  17. You want to pay off a loan that is a 3 year loan with an APR of 8.5%. Your monthly payment is $212 and you want to pay it off 6 months early. • Find the unearned interest. • Find the payoff amount.

  18. Homework • P887 #13 – 20, 27, 29

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