Week 5: Consumer Mathematics

Everyone benefits from effective money management. Money is earned, bills are paid, and savings accounts are created. But what happens when the money you earn is not enough to cover your immediate needs or wants? This is where a loan comes in.

No matter how much money you make in your lifetime, it is likely that at some point you will take out a loan. This could be for education, a home, a car, or a hobby, such as a boat. If you have taken out a loan, you already know there is a cost for taking that loan. How much of that loan is interest, or money paid to the financial institution for lending you the cash? How much of your monthly payment is paying down the debt, and how much is paying interest on that amount? If you haven’t taken out a loan before, you will be glad to work through this math now so that you are prepared for the true costs involved.

This week, you will explore the math behind finances, loans, and interest payments. You also re-examine your own personal financial management techniques.

Discussion: Repaying Loans

Before taking out a loan, it is important to know the repayment terms and how your interest rate and the time of the loan affect the total loan balance.

For this Discussion, you examine the effect of simple and compound interest, as well as time on the principal balance of a loan. You also explore how these variables affect loan repayment.

To prepare for this Discussion:

• Think of a big-ticket item you might need to take out a loan to purchase. Dream big. What have you always wanted? This could be a boat, car, motorcycle, a trip around the world, etc. Research the cost of this item.
• Select a reasonable interest rate for your item (between 2% and 10% is standard).
• Select a time period to pay off your loan (between 3 and 10 years is common

• Post at least 2 paragraphs in response to the following:
  • Paragraph 1:
    • Describe the item you are taking a loan out for and the purchase price.
    • Include your chosen interest rate and amount of time for your loan.
    • Determine the amount of interest you will pay throughout the term of the loan and the final cost of the item when the loan is paid in full. Note: Assume your bank uses the simple interest formula: Interest = Principal * Rate * Time.
    • Show the work needed to find the amount of interest and total cost.
    • Determine the monthly payment for this loan.
  • Paragraph 2:
    • Repeat the interest computation however lower the time frame by one year. Show your work.
    • Determine the total amount of the loan when paid in full.
    • Compute the new monthly payment.
    • Explain if you are surprised by the results. Why, or why not?
    • Discuss one change you could make in your life to make the new monthly payment possible.