HOW DO YOU FIGURE INTEREST OR CREDIT COST? 



In these days of interest rate increases it helps sometimes in deciding where 

 to get credit to know how to figure interest rate or cost reduced to some standard. 

 In these examples we have used the actual annual rate of interest as the standard. 



You trade your car or truck for another one and the difference is $960 and 

 your old car is the dox-m payment. You are asked to sign a 12-month note to a 

 finance company with monthly payments of $89.51. How much interest will you be 

 paying? 



$89.51 X 12 m $1,074.12 s Total amount to be paid 



Principal amount financed ■ $960.00 



Finance or interest charge ■ $114.12 



Average amount outstanding during the year z $520.00 



$114.12 divided by $520 - 21.95 per cent interest 



When the monthly payment plan or any other plan calling for equal and evenly 

 spaced payments is used, one way to figure the actual rate of interest charged 

 is to use the following formula: 



Actual 



Total of finance charges ^ No. of payments ^^ 1 = Annual 



% original loan No of years No. of payments ♦ 1 Rate of 



Interest 



Substituting figures in the last example: 

 114.12 12 ^ 1 « 1 369.44 m 21.95% interest 



480.00 1 13 6240.00 



If you can borrow the money from a lender who charges 6 per cent of the face 

 amount your annual rate will be 11.08 percent annually and you will save $56.52 

 over the cost from the finance company. 



If you borrow the money from a lender who charges 6 per cent of the face 

 amount and deducts it from the note (discounting) then your rate will be 11.78 

 and you will have "paid" the interest in advance. The note to give you approxi- 

 mately $960 (actually $958.80 would be for $1020 z $61.20 would be deducted 

 for advance interest payment and the calculation using the formula would be as 

 follows: 



11.787o - the actual annual rate of interest 



Instead of interest, some time payment plans include "carrying charges" and 

 sometimes other names are used such as "credit" charge. Like the old Frenchman's 



