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Creditworthiness

Problem 1

Objectives:
Calculate the total cost of a loan.

Task:
Respond to each of the scenarios below. Compute the answer showing your work.

Context:

1. You are considering buying a used piano. The cash price of the piano is $600. The company selling the piano is willing to sell it to you for $50 down plus 12 monthly payments of $50. What is the total price. What is the finance charge?

2. Logan ran up a credit card debt of $1,000. He decided that he would not put any more purchases on the card until he paid off the debt. He can pay $50 a month, and the interest rate is 18 percent. On the internet, locate a loan planner tool to find out how many monthly payments Logan will have to make to pay off his debt. How many years will he be paying on the debt?

Problem 2

Objectives:
1. Explain the advantages and disadvantages of using credit.
2. Describe the concept of creditworthiness.
3. Describe the responsibilities of consumer credit.

Task: Respond to the questions below.

Context:

The wide use of credit can lead to abuses. Some people take out more credit than they can repay and refuse to pay back what they have borrowed. When merchants get stuck with unpaid balances, they pass along that cost to other customers in the form of higher prices. Thus we all pay for people who overuse credit.

Is it ethical for people to overextend their credit, knowing or suspecting that they will not be able to repay it?
What can we all do to keep the cost of products and services at reasonable levels?

Solution Preview

1. You are considering buying a used piano. The cash price of the piano is $600. The company selling the piano is willing to sell it to you for $50 down plus 12 monthly payments of $50. What is the total price? What is the finance charge?

$50 down payment + ($50 x 12 payments) = $650 total price if financed.
Finance Charge= Financed Price - Cash Price = $650 - 600 = $50 finance charge
Alternatively, expressed as an interest rate= Finance Charge divided by Cash Price= 50/600= 8.33%

2. Logan ran up a credit card debt of $1,000. He decided that he would not put any more purchases on the card until he paid off the debt. He can pay $50 a month, and the interest rate is 18 percent. On the internet, locate a loan planner tool to find out how many monthly payments Logan will have to make to pay off his debt. How many years will he be paying on the debt?

It will take two years (24 monthly payments) to pay-off the initial loan, including accrued interest.
Online calculator shows the amortization of the loan as well:
http://www.timevalue.com/products/tcalc-financial-calculators/credit-card-payoff-calculator.aspx

1. Explain the advantages and disadvantages of using credit.
- Credit provides quick access to capital--allowing immediate purchases or investments. Without access to credit, purchases must be planned over ...

Solution Summary

References included.

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