Consumer Math Lesson 3.03 LOANS

What is a loan?

A personal loan is one you may need to pay debts, cover an emergency repair, or buy an item (not a car or house as they involve different types of loans). It is always best to save up to these kinds of expenses, but at times, when the need is great, you may need to consider getting a personal loan from a bank.

• Why not use the credit card instead? The main reason is the finance cost. In general, you can get a lower APR through a credit union or bank than you can on the credit card. This means that the overall cost of the loan will be less.

• It is a good idea to check with more than one bank or credit union before getting the loan. Some banks and credit unions have better terms and lower APRs than others.

• You will be required to fill out an application. If this is approved, you will usually make monthly payments to pay it back. This means you must adjust your budget for the loan payment.

How much is the total payment?

$70 x 6 = $420

How much interest will she pay?

$420 - $400 = $20

Working with Loans

Sarah's college scholarship covers the cost of tuition and room and board. But she needs $400 for textbooks in her first semester. To cover this, she is taking out a loan from her local bank. She will pay $70 a month for 6 months.

• How much is the total payment?

• How much interest will she pay?

​Alonzo borrowed $390 at 13% for 6 months for his textbooks. The loan officer used an interest table to find his interest and figure his payments.
How much interest will he pay?

You found the interest. Now, how much will his monthly payments be?

Using Tables to Find Interest

Many banks and credit unions use rate tables to determine how much interest to assess on a loan. The rate depends on the following:

• the amount borrowed

• the length of time to repay

Most banks use a computer program to actually process the loan. But when helping a client figure how long they want to take to pay back the loan, the bank employees may consult the tables for a quick estimate.

So let’s get back to your loan of $750 for the car repair. The APR is 11 percent, but you are considering different amounts of time by which you might be able to pay if off. You think you may want to borrow it over a period of 15 months so that your monthly payment is a little less than if you were to try to pay it back in 12 months.

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Using Rate Tables