Personal Financial Planning 13Th Edition Gitman Solutions Manual Full Chapter PDF

Personal Financial Planning 13th
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Chapter 7
Using Consumer Loans
Chapter Outline
Learning Goals
I. Basic Features of Consumer Loans
A. Using Consumer Loans
B. Different Types of Loans
1. Student Loans
a. Obtaining a Student Loan
b. Are Student Loans “Too Big to Fail”?
c. Strategies for Reducing Student Loan Costs
2. Single-Payment or Installment Loans
3. Fixed- or Variable-Rate Loans
C. Where Can You Get Consumer Loans?
1. Commercial Banks
2. Consumer Finance Companies
3. Credit Unions
4. S&L Associations
5. Sales Finance Companies
6. Life Insurance Companies
7. Friends and Relatives
*Concept Check*
II. Managing Your Credit
A. Shopping for Loans
1. Finance Charges
2. Loan Maturity
3. Total Cost of the Transaction
4. Collateral
5. Other Loan Considerations
B. Keeping Track of Your Consumer Debt
*Concept Check*
III. Single-Payment Loans
A. Important Loan Features
1. Loan Collateral
2. Loan Maturity
3. Loan Repayment
B. Finance Charges and the Annual Percentage Rate
1. Simple Interest Method
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112
Using Consumer Loans — Chapter 7
2. Discount Method
*Concept Check*
IV. Installment Loans
A. A Real Consumer Credit Workhorse
B. Finance Charges, Monthly Payments, and the APR
1. Using Simple Interest
2. Add-on Method
3. Prepayment Penalties
4. Credit Life Insurance
C. Buy on Time or Pay Cash?
*Concept Check*
Summary
Financial Planning Exercises
Applying Personal Finance
Making the Payments!
Critical Thinking Cases
7.1 Financing Anita’s Education
7.2 Michael Gets His Outback
Money Online!
Major Topics
Although saving is an important way to reach a financial goal, borrowing by using a
consumer loan may also help you attain your personal financial goals. Consumer loans are
an important part of achieving financial goals, particularly when the amount borrowed and
the debt repayment requirements are well within the budget. There are a variety of
consumer loans available for a variety of purposes. The major topics covered in this
chapter include:
1. One of the most legitimate reasons for going into debt is to pay for a college
education. There are several federally sponsored, subsidized student loan programs
available: Stafford Loans, Perkins Loans, and Parent Loans (PLUS).
2. Installment loans are frequently preferred to single-payment loans because of the
ease of repayment over time.
3. Consumer loans can be obtained from commercial banks, consumer finance
companies, credit unions, savings and loan associations, sales finance companies,
life insurance companies, and friends or relatives.
4. When shopping for a loan, the borrower should be aware of finance charges and
other terms of the loan, as well as the total cost of the debt.
5. Single-payment loans usually mature in one year or less, and interest can be
calculated using the simple method or the discount method.
6. Installment loans can have maturities of up to seven to ten years, and interest can
be calculated using the simple method or the add-on method.
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Part 3 — Managing Credit
7. Consumer loans may have various provisions, including collateral requirements,

variable or fixed interest rates, recourse clauses, and other clauses that protect the
position of the lender.
8. Comparisons among various loans should include calculation of the annual interest
rate charged on the loan.
Key Concepts
This chapter introduces a number of key phrases and concepts associated with consumer
loans. It continues to stress the relationship of consumer actions, such as borrowing to
fulfill a personal financial goal, and the requirements of good financial planning so that the
burden of borrowing fits into the budget. The following phrases represent the key concepts
stressed in this chapter.
1. Student loans
2. Single-payment and installment loans
3. Fixed- or variable-rate loans
4. Consumer finance and sales finance companies
5. Cash value of life insurance policies
6. Loan provisions to protect the lender
7. Finance charges and total cost of the loan
8. Annual percentage rate calculation
9. Simple interest method and discount method for single-payment loans
10. Simple interest method and add-on method for installment loans
11. Rule of 78s
Answers to Concept Check Questions

7-1. The five major reasons to use consumer loans are:
a. To buy a new car. Auto loans account for nearly 35% of all consumer loans. As
a rule, 80 to 90% of the cost of a new vehicle will be financed with credit; the
buyer must come up with the rest through a down payment. The auto is the
collateral for the loan, and it can be repossessed in the event that the buyer fails to
make payments. These loans generally mature in 36 to 60 months.
b. To purchase other costly durable goods. These loans are used to purchase such
things as furniture, appliances, recreational vehicles, even mobile homes. The item
purchased serves as collateral, and some down payment is almost always required.
The loans can mature in as short a time as 9 to 12 months for less costly items all
the way to 10 to 15 years or longer for purchases such as a mobile home.
c. To pay for an education. Many students, or their parents, have taken out loans
to pay for high-cost college education. These loans often carry low interest rates,
and loan repayment often does not start until the student is out of school.
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d. As a personal loan. This type of credit is used to make expenditures for

nondurables, such as an expensive vacation, or to cover temporary cash shortfalls.
Many personal loans are made on an unsecured basis.
e. As a consolidation loan. These loans are used to straighten out an unhealthy

credit situation. For various reasons, consumers sometimes use their available
credit to such an extent that they are no longer able to service the debt promptly and
in a timely manner. When this happens, they can often consolidate the loans to
systematically bring the credit under control. In effect, they borrow money from
one source to pay off the other forms of borrowing. The usual effect of such a move
is to reduce the total payment, but payments may have to be made for a longer time
period.
7-2. The federal government makes available several different types of subsidized
educational loan programs:
• Stafford loans
• Perkins loans
• Parent loans (PLUS)
The Stafford and Perkins loans form the foundation of the government's student
loan programs, and PLUS loans are supplemental programs for students who either
need the funds but do not qualify for Stafford/Perkins loans, or who do qualify for
Stafford/Perkins loans but need additional funds. Generally speaking, the loans
carry very low, government-subsidized interest rates, and with Stafford and Perkins
loans, repayment does not begin until the student is out of school. As long as the
student is making satisfactory progress academically and can show a need
financially, the loans are fairly easy to obtain and do not involve a lot of "red tape."
There are limits on the amount that can be borrowed each year, though there is no
limit on the number of loans you can take out.
7-3. In contrast to regular consumer loans, the subsidized student loan programs are
very lenient; they may not even involve credit checks, and they are less costly and
have more accommodating loan repayment provisions. Repayment with some loans
does not even begin until after graduation, and then the student can take as long as
10–20 years to pay off the loans. Also, interest on student loans is tax deductible.
This question deals with the students' views of these loans; this could provide some
lively discussion of what they think of these loans, what they see as the positive
and negative aspects of the programs, etc.
7-4. Borrowing as little as possible is an upfront strategy on student loans. A student

should consider how much to borrow in light of his/her expected future salary. In
addition, explore all possible grants and scholarships, as well as apply to federal
student aid. Upon graduation, explore the Public Service Loan Forgiveness and
115
Loan Repayment Assistance programs. There may also be an option to consolidate

federal student loans and to participate in an income-based repayment program.
7-5. a. The interest rate as well as monthly payment on fixed-rate loans remains the
same over the life of the loan. With variable rate loans, the interest rate changes
monthly, quarterly, or semiannually in line with market conditions.
b. Single-payment loans are made for a specified period of time at the end of
which full payment is due. They are available primarily from commercial banks,
consumer finance companies, life insurance companies, sales finance companies,
pawnshops, and friends and relatives. Installment loans are made generally for six
months or more and are repaid in a series of fixed scheduled payments. They are
primarily available from commercial banks, consumer finance companies, credit
unions, savings and loan associations, and sales finance companies.
7-6. a. Consumer finance companies—A consumer finance company, often called a

small loan company, provides secured and unsecured or signature loans to qualified
individuals. They acquire their funds from stockholders or borrow funds from
various sources. They loan these funds to borrowers at generally high annual
interest rates. The amount they loan and the rate charged are normally dependent on
state laws. Loans are usually for a short period of time to high-risk borrowers.
b. Sales finance companies—A sales finance company provides installment

financing for a retailer's customers who may purchase such items as automobiles,
furniture, or appliances. The retailer originally lends its money to the customer to
promote the sale and initially holds the loan contract. The retailer may not want to
tie up its money for very long with installment loans, so the retailer then sells the
customers' contracts to a finance company. The customer will then be notified to
make his or her payment directly to the finance company. Interest rates will usually
be higher than those offered by banking institutions and will vary depending on the
maturity date of the loan and the amount of the purchase.
Captive finance companies—Captive finance companies, such as General Motors

Acceptance Corporation (GMAC) and General Electric Credit Corporation
(GECC), are the largest sales finance companies and are owned by large
corporations. These institutions usually purchase the installment loan contracts
made by their product dealers.
7-7. a. Credit unions offer loans to people and their immediate families who belong to
the credit union and who are members of a particular working environment or
organization. No nonmembers are allowed to save, loan, or participate in the
activities of the lending organization. Interest rates are low relative to other
institutions. The loans may be secured or unsecured. An added feature is that loan
payments may be deducted from payroll checks. This type of borrowing is one of
the most favorable for non-housing consumer loans.
116
b. Savings and loan associations deal primarily in home mortgages, but they also
make consumer loans to qualified borrowers. S&Ls are regulated with regard to
how much they can put into consumer loans; as a rule, their loans tend to go for
consumer durables or for home improvements. The interest rates charged typically
depend on a number of factors and are usually slightly above commercial bank
rates.
7-8. Basically, before taking out a consumer loan you should ask yourself: 1) Does
making this acquisition fit into your financial plans? and 2) Does the required debt
service on the loan fit into your monthly cash budget? If the expenditure in
question will seriously jeopardize your financial plans and/or the repayment of the
loan is likely to place an undue strain on your cash flow, you should reconsider the
purchase.
7-9. When shopping for a consumer loan, you should pay particular attention to the
following loan features:
• Finance charges (APR)—how much are you going to have to pay?

• Loan maturity—does the term of the loan (and, therefore, the size of the payment)
fit your needs and your budget?
• Collateral—is there going to be any, and if so, what?
• Other considerations—what is the total cost of the transaction, including all
finance charges, when are the payments due, how is interest figured (simple vs.
add-on), and what kind of an interest refund will you receive if you prepay your
loan?
To determine the total cost of the transaction, multiply the monthly loan payments
by the number of payments to be made. Then add the down payment and any other
fees and charges to determine the total.
7-10. A lien gives the lender the power to liquidate loan collateral to satisfy its claim in
the event of default. It is part of a secured loan.
7-11. A loan rollover is requested when the borrower is unable to repay the loan when it
matures. It involves taking out another loan to repay the original loan in full.
7-12. Under the simple interest method, interest is charged on the actual loan balance
outstanding. The discount method first computes interest and then subtracts it from
the principal. The borrower gets the difference, not the full amount of the loan.
While the amount of interest paid is the same, the APR is higher with the discount
method, because you receive less in loan proceeds for the same amount of interest.
The simple interest method is better for the borrower.
7-13. An installment loan can be used for many types of purchases and can range from a
few hundred dollars to thousands of dollars. These loans are usually calculated at a
fixed interest rate, and set payments are made at given intervals, such as monthly or
117
yearly. These loans typically have maturities of 6 months to 15 years. Most are
secured, either by the item purchased, a financial asset, or your home.
7-14. A home equity loan lets a homeowner use his or her home as collateral to borrow a
given amount of money for a set period of time at either a fixed or variable rate of
interest. Except for the collateral (home-equity loans take a second mortgage on the
borrower's home), there is really no difference between a home equity loan and a
regular installment loan. They both involve a fixed amount of money that is paid
back in monthly installments over time.
Advantages of a home equity loan: They can be used to obtain large sums of
money; they have long repayment periods (of as long as15 years), which keeps
payments low; they generally carry lower interest rates than other forms of
consumer loans; and (their biggest advantage) the interest on the loans is still tax-
deductible for those who itemize their deductions (some limits apply).
Disadvantages: The availability of these loans may encourage people to take out
big loans that can far outlive the assets acquired with the loans; there are costs
involved in setting up these loans; and, of course, you stand to lose your home if
you cannot repay the loan.
7-15. Purchasing credit life and disability insurance may be a condition of receiving an
installment loan. This assures the lender that in the event of death or disability of
the borrower, the loan will still be repaid. Credit life insurance provides for
repayment of the entire outstanding loan balance at the death of the borrower.
Credit disability insurance assures the lender the scheduled installment payments
will continue in the event the borrower becomes disabled and unable to meet the
scheduled installment payments. The seller's or lender's ability to dictate the terms
of these insurance requirements is restricted by law in many states. From the
borrower's perspective, such insurance is not a very good deal—it is very costly
and really does little more than provide lenders with a very lucrative source of
income. Purchasing term life insurance instead is usually more cost effective.
7-16. The simple interest method on installment loans refers to the fact that interest is
charged only on the actual installment loan balance outstanding each period and not
on the entire original balance. Each time a payment is made, the principal is
reduced somewhat, and the interest for the next period is calculated on the
remaining installment loan balance. You are better off, as a borrower, with simple
interest versus add-on interest.
7-17. If the consumer has adequate liquid reserves and if those reserves are held in an
interest-earning account, then if it costs more to borrow the money than can be
earned in interest in the savings account, one should not borrow but draw down
from savings. In contrast, borrowing becomes the better course of action if the
borrowing cost is less than the rate earned on savings, or if the borrower does not
have any liquid reserves to draw on.
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Financial Planning Exercises

1. Although Bridget could borrow money for college through normal channels through a
regular consumer loan from the bank, better avenues exist such as several federal and
state subsidized educational loans Federally sponsored programs include:
• Stafford Loans (Direct and Federal Family Loans--FFELs).
• Perkins Loans
• Parents Loans (PLUS)
Stafford and Perkins Loans have the best terms and are the foundation of the government’s
student loan programs. In contrast, PLUS loans are supplementary loans for undergraduate
students who demonstrate a need for funding but do not qualify for Stafford or Perkins
Loans. The best place to look for funding is on the Internet through such sites as
FASTWEB, which can provide loan and scholarship information as well as form type
application letters. Exhibit 7.1 could help understand interest rates, borrowing limits and
terms.
To minimize her borrowing costs and maximize her flexibility, Bridget should borrow as
little as possible to cover college costs. One way to meet this goal is to quantify borrowing
based on future expected salary and then figure out what amount of monthly payment will
be affordable. This analysis should also look for the lowest interest rate. Before making the
final decision, Bridget should explore all possible grants and scholarships and apply for
Federal aid. At graduation, there are also money saving forgiveness and deferment
programs to explore, as well as options to consolidate federal student loans and participate
in an income-based repayment program.
2. The Auto Boss deal total cost:

$3,000.00 down + (48 × $333.67) = $3,000 + $16,016.16 = $19,016.16
The Four Wheel Specialists deal total cost:
$3,500.00 down + (60 × $265.02) = $3,500 + $15,901.20 = $19,401.20

Based on total cost, the Auto Boss loan is better. The monthly payment offered by
Four Wheel Specialists is lower, but the longer time period makes the total cost
paid higher with Four Wheel Specialists, and they require a higher down payment.
3. As shown on Worksheet 7.1, Brad’s debt safety ratio for his consumer debt is
30.2%, considerably higher than the suggested maximum of 20%. He has
overextended himself, particularly since he also has his mortgage payments, and
chances are that he will have difficulty continuing to meet these payments and the
single-payment loan when it comes due.
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Worksheet 7.1
120
4. On a single-payment loan, the finance charge using the simple interest method or
Fs = Principal × Rate × Time. So Kevin will owe the original principal plus interest
at the end of the time period or $8,000 + ($8,000 × 0.06 × 5) = $8,000 + $2,400 =
$10,400.
If Kevin must pay the interest annually on this loan, then he would owe $480 each
year ($8,000 × .06 × 1). At the end of year 5, he would owe the interest for that
year plus the principal, or $8,000 + $480 = $8,480.
5. Use the financial calculator set on End Mode and 12 payments/year to solve for the
payment:
3,000+/- PV
24 N
6 I
PMT $132.96
As explained in problem 3 above, when you use the financial calculator to solve for
payment, you are using the simple interest on the installment method. Your
calculator may also have an Amortization feature to help you with determining how
much of each payment goes toward principal and how much goes toward interest.
An Excel spreadsheet was used to create the following table. The monthly interest
rate is found by dividing the yearly rate of 6% by 12 or 0.06/12 = 0.005.
Outstanding Monthly Interest Principal Balance

Charges
Loan Balance Payment [(1) × .005] [(2) - (3)] Remaining
Month (1) (2) (3) (4) After Payment
1 $3,000.00 $132.96 $15.00 $117.96 $2,882.04
2 $2,882.04 $132.96 $14.41 $118.55 $2,763.49
3 $2,763.49 $132.96 $13.82 $119.14 $2,644.35
4 $2,644.35 $132.96 $13.22 $119.74 $2,524.61
5 $2,524.61 $132.96 $12.62 $120.34 $2,404.27
6 $2,404.27 $132.96 $12.02 $120.94 $2,283.33
7 $2,283.33 $132.96 $11.42 $121.54 $2,161.79
8 $2,161.79 $132.96 $10.81 $122.15 $2,039.64
9 $2,039.64 $132.96 $10.20 $122.76 $1,916.88
10 $1,916.88 $132.96 $9.58 $123.38 $1,793.50
11 $1,793.50 $132.96 $8.97 $123.99 $1,669.51
12 $1,669.51 $132.96 $8.35 $124.61 $1,544.90
13 $1,544.90 $132.96 $7.72 $125.24 $1,419.66
14 $1,419.66 $132.96 $7.10 $125.86 $1,293.80
15 $1,293.80 $132.96 $6.47 $126.49 $1,167.31
16 $1,167.31 $132.96 $5.84 $127.12 $1,040.19
17 $1,040.19 $132.96 $5.20 $127.76 $912.43
121
Outstanding Monthly Interest Principal Balance

Charges
Loan Balance Payment [(1) × .005] [(2) - (3)] Remaining
Month (1) (2) (3) (4) After Payment
18 $912.43 $132.96 $4.56 $128.40 $784.03
19 $784.03 $132.96 $3.92 $129.04 $654.99
20 $654.99 $132.96 $3.27 $129.69 $525.30
21 $525.30 $132.96 $2.63 $130.33 $394.97
22 $394.97 $132.96 $1.97 $130.99 $263.98
23 $263.98 $132.96 $1.32 $131.64 $132.34
24 $132.34 $133.00 $0.66 $132.34 $0.00
Adding the interest charges for the first 12 months of the loan, you can see that
$140.42 in interest will be paid during the first year of this loan.
6. [We will assume that the loan amount requested is $1,000 and compute the interest
rate using both methods.]
Using the simple interest method, the finance charges on a 6.5 %, 18-month single-
payment loan would be:
Finance charge = Principal × 6.5% × 1.5 years

= $1,000 × 0.065 × 1.5
= $97.50
Using the discount method, the finance charge is the same dollar amount as that
obtained with the simple interest method. However, the finance charges are
subtracted first from the amount requested, and then the borrower receives what’s
left, or the proceeds. Using the same setup as in the example above:
Amount requested – interest = loan proceeds received

$1,000 – $97.50 = $902.50
The real difference between these two loans is shown when you compute the APR:
Average annual finance charge
Average loan balance outstanding
APR for the simple interest method is calculated by dividing the finance charge by
the life of the loan and then dividing this annual charge by the loan balance ($1,000
in our example).
APR = ($97.50/1.5) = $65 = 6.5%

$1000 $1,000
The APR for the discount method is found in a similar manner:
122
APR = ($97.50/1.5) = $65 = 7.2%

$1,000 – $112.50 $902.50
7. First State Bank will lend Kristin the $4,000 for 12 months through a single-
payment loan at 8% discount. The APR on this loan is calculated as follows:
APR = $4,000 × .08 × 1 = $ 320 = 8.7%
$4,000 – $320 $3,680
Home Savings and Loan will make the $4,000 single-payment, 12-month loan at
10% simple interest. The APR on this loan is:
APR = $4,000 × .10 ×1 = $ 400 = 10%
$4,000 $4,000
Kristin should borrow the money from First State Bank because they will charge
her an annual percentage rate (APR) of 8.7%, while Home Savings and Loan will
charge her an APR of 10%.
8. a. FS = $10,000 × .07 × 5 = $3,500.
b. Monthly payment = ($10,000 + $3,500)/60 = $225.00
c. Payments under the simple interest method (determined using a calculator or

approximated using Exhibit 7.5) are $198.00. So the add-on method costs $27 more
a month than the simple interest method ($225 − $198).
9. Using the financial calculator, set on End Mode and 12 payments/year:
5,000 + PV
36 N
$166.10 PMT
I/YR 12.0119
[(1 + .010010)^12] – 1 = 1.1270 – 1 = 12.70% APR
10. a. Using the financial calculator, set on End Mode and 12 payments/year:
20,000 +/- PV
60 N
4.0 I/YR
PMT $368.33
b Outstanding Monthly Interest Charges Principal

Loan Balance Payment [(1) × .0033] [(2) – (3)]
Month (1) (2) (3) (4)
1 $20,000.00 $368.33 $66.67 $301.66
2 $19,698.34 $368.33 $65.66 $302.67
123
3 $19,395.67 $368.33 $64.65 $303.68

4 $19,091.99 $368.33 $63.64 $304.69
5 $18,787.30 $368.33 $62.62 $305.71
6 $18,481.59 $368.33 $61.61 $306.73
7 $18,174.86 $368.33 $60.58 $307.75
8 $17,867.11 $368.33 $59.56 $308.77
9 $17,558.34 $368.33 $58.53 $309.80
10 $17,248.54 $368.33 $57.50 $310.84
11 $16,937.70 $368.33 $56.46 $311.87
12 $16,625.83 $368.33 $55.42 $312.91
Total Interest Paid in First Year: $732.90
c. ($368.33 × 60) = $22,099.80 − $20,000 = $2,099.80
d. [(1 + .04/12)^12] − 1 = (1.0033)^12 − 1 = 1.0403 − 1 = 4.03%
11. To solve for the APR, divide the purchase price of $2,000 by $1,000 to get 2. Then
divide the payments given by 2 and look up that amount in the columns under the
given time periods. Clearly, Dealer A is offering the better deal.
Dealer A: Divide the quoted monthly payment of $119.20 by 2 to get $59.60. Look
under the 18 month column to find that the APR is 9%.
Dealer B: Divide the quoted monthly payment of $69.34 by 2 to get $34.67. Look
under the 36 month column to find that the APR is 15%.
You can also use the financial calculator to find the APR as shown below. Set your
calculator on End Mode and 12 payments/year. You must put in either the PV or
PMT as a negative in order to solve the problem.
Dealer A Dealer B
2,000 +/- PV 2,000 +/- PV
119.2 PMT 69.34 PMT
18 N 36 N
I 9% I 15%
12. a. Patricia Fox plans to borrow $5,000 to be paid back in 36 monthly payments.
At an annual add-on interest rate of 7 1/2%, the total finance (interest) charges are:
Finance Charge using Add-On Method = Principal × Rate × Time
FS = $5,000 × 0.075 × 3 = $1,125
b. The monthly payment on the loan is:
$5,000 + $1,125 = $170.14
124
36
c. Use the financial calculator to find the annual percentage rate (APR) of interest
on this loan. Set your calculator on End Mode and 12 payments/year.
5,000 +/- PV
36 N
170.14 PMT
I/YR 13.69%
Note that the reason the financial calculator can be used to solve for the APR is
because the time value of money formulas programmed into the calculator are
based on the simple interest method. For installment loans, simple interest is
calculated on the outstanding loan balance for each time period. Since the
definition of APR is based on simple interest as well, when you solve for I% on the
financial calculator, you have also calculated the APR, assuming that the interest is
the only finance charge involved.
13. a. Using Worksheet 7.2 on whether to borrow or pay cash, we see that line 12 is
negative, indicating that the better option is to borrow the money on an installment
loan. Therefore, Constance will lose less in interest if she borrows the funds rather
than draws down her savings. Therefore, she should finance the home
entertainment center.
b. Because line 12 is still negative, Constance is still better off financing the
entertainment center with a home equity loan rather than using savings that is
earning 5%. Even with the higher interest rate of 6% on the loan, the tax
deductibility makes it less expensive to borrow the money.
125
Problem 13a—Worksheet 7.2
126
Problem 13b—Worksheet 7.2
14. a. The furniture store will lend Charles the $6,400 for 48 months at 6.5% add-
on. Monthly payments using this method are calculated as follows:
Finance charges = P × R × T
= $6,400 × 0.065 × 4 = $1,664
127
Payment = $6,400 + $1,664 = $8,064 = $168

48 48
The credit union will lend Charles the $6,400 for 24 months at 6% simple interest.
Monthly payments using this method are calculated with the financial calculator as
follows. Set your calculator on End Mode and 12 payments/year.
6,400 +/- PV
24 N
6 I/YR
PMT $283.65
b. The APR for the loan from the furniture store can be calculated with the
financial calculator, because the time value of money equations programmed into
the financial calculator use the simple interest method, which yields the APR. Set
your calculator on End Mode and 12 payments/year.
6,400 +/- PV
48 N
168 PMT
I/YR 11.83%
The APR for the loan from the credit union is the stated rate of 6%, because APR is
calculated using the simple interest method. To prove this point, we can create a
Monthly Payment Analysis Table for the first year's payments to derive the
numbers necessary to calculate the APR.
Outstanding Monthly Interest Charges Principal
Loan Balance Payment [(1) × .005] [(2) – (3)]
Month (1) (2) (3) (4)
1 $6,400.00 $283.65 $32.00 $251.65
2 $6,148.35 $283.65 $30.74 $252.91
3 $5,895.44 $283.65 $29.48 $254.17
4 $5,641.27 $283.65 $28.21 $255.44
5 $5,385.83 $283.65 $26.93 $256.72
6 $5,129.08 $283.65 $25.65 $258.00
7 $4,871.08 $283.65 $24.36 $259.29
8 $4,611.79 $283.65 $23.06 $260.59
9 $4,351.20 $283.65 $21.76 $261.89
10 $4,089.31 $283.65 $20.45 $263.20
11 $3,826.10 $283.65 $19.13 $264.52
12 $3,561.58 $283.65 $17.81 $265.84
Total Interest Paid in First Year: $299.58
To calculate the APR, take the interest paid in year 1 and divide by the average
outstanding loan balance:
$299.58 = 6.18%
($6,400 + $3,295.74)  2
128
c. A loan over the same time period with a lower APR will save the consumer more in
interest charges. In the loan examples given in this problem, the furniture store offered a
higher stated rate (6.5% vs. 6%) and lower monthly payments ($168 vs. $283.65). The
APR on the furniture store's offer was higher (11.83% vs. 6.18%) as was the total cost of
the interest over the life of the loan ($1,664 vs. $407.65). It stands to reason that because
the credit union's loan was over a shorter time period, the interest charges would be less.
While it is difficult to evaluate loans over different time periods, here both the interest
rate and time period for the credit union are less resulting in less interest paid.
However, sometimes consumers may be forced to go with the loan which offers the
lowest monthly payments, whether it's the most cost effective or not, because of budget
constraints. Then consumers need to ask themselves if they really need to make the
purchase now or if they would be better off waiting.
[Note: To find the total cost of interest over the life of a loan, multiply the monthly
payments by the number of months on the loan and then subtract the principal amount.]
Solutions to Critical Thinking Cases

7.1 Financing Anita’s Education
1. With the North Carolina State Bank discount interest loan:
a. Anita would receive initial proceeds of $26,400 calculated as follows:
Principal Amount $30,000

Less: Interest for two years ($30,000 × .06 × 2 years) 3,600
Initial Loan Proceeds $26,400
b. At maturity, Anita would be required to repay the $30,000 principal.
2. a. The finance charges on the North Carolina State Bank loan would be $3,600 as
shown above in the interest calculation.
b. The APR on the North Carolina State Bank loan can be calculated using the
equation:
APR = Average Annual Finance Charge
Average Loan Balance Outstanding
The average annual finance charge is $1,800 ($3,600/2). The average loan balance
is the initial loan proceeds, $26,400. Substituting into the equation, the APR is:
APR = $1,800 = 6.8%
$26,400
129
3. a. The finance charge on the simple interest loan from the National Bank of
Chapel Hill is $25,000 × .07 × 2 years = $3,500.
b. The APR on this loan is found by substituting the appropriate values into the
APR equation:
APR = $3,500/2 = 7%
$25,000
This result is not surprising, since the APR and the stated rate of interest on a
simple interest loan are always equal.
The loan payment due at the end of two years is $30,000 ($25,000 principal +
$3,500 interest).
4. The discount loan from North Carolina State Bank (line a in the table below) is
preferred since it has a lower APR and she will spend a little less in finance charges
while receiving a bit more in proceeds.
The following table illustrates the features of each loan:
Stated Finance Amount Amount
Method Rate Charge Received Repaid APR
a. Discount loan 6% $3,600 $26,400 $30,000 6.8%
b. Simple interest loan 7% $3,500 $25,000 $30,000 7%
5. Since Anita plans to spend the $25,000 over the following two years, she should
either (1) try to arrange a line of credit in which she can draw the money as needed,
with the interest being charged only as the funds are disbursed, or (2) immediately
invest the funds in a highly liquid savings instrument, such as a savings account or
money market mutual fund. Each of these alternatives should allow Anita to reduce
the total finance charges, either (1) by only paying interest on needed funds or (2)
by earning a return on the unneeded portion of the loan until the funds are needed.
These two approaches should help Anita avoid paying interest on currently
unneeded funds while assuring her that her $25,000 college education expense will
be met.
7.2 Michael Gets His Outback
1. The First National Bank of Charlottesville will lend Michael the $8,900 for 36
months at 6% simple interest. Monthly payments using this method are calculated
with the financial calculator as follows. Set your calculator on End Mode and 12
payments/year.
8,900 +/- PV
36 N
6 I/YR
PMT $270.76
130
2. a. The total finance charges on this installment loan can be found by subtracting
the loan principal from the total payments of $9,747.36 (36 months ×
$270.76/month):
Total finance charges = ($9.747.36 – $8,900) = $847.36
b. Since interest on this simple interest installment loan is charged only on the
outstanding loan balance, the APR equals the stated interest rate of 6%.
3. The first step in determining the monthly payment required on the add-on interest
loan from the Charlottesville Teacher's Credit Union is to calculate the total finance
charges.
Finance Charges = P × R × T
Finance Charges = $8,900 × .045 × 3 = $1,201.50
The monthly payment can then be found by adding the principal to the finance
charges and dividing by the number of monthly payments:
Monthly payments = $8,900 + $1,201.50 = $10,101.50 = $280.60

36 months 36
4. a. The finance charges on the Charlottesville Teachers' Credit Union loan are
$1,201.50 per question 3 above.
b. To find the APR, use the financial calculator. Set on End Mode and 12
payments/year:
8,900+/- PV
36 N
280.60 PMT
I/YR 8.41%
5. The following table summarizes the key characteristics of the two loans.
Comparing the monthly payment, total finance charges, and APR on the two loans,
it's clear that while the two loans are about equal, the one from the credit union
(line b) has a slight edge over the one from the bank (line a), which has a slightly
higher monthly payment, total finance charge, and APR. Such being the case,
Michael should then compare the institutions on other features that are important to
him, such as convenience, helpfulness, or possibly one might lower the interest rate
if he allows the institution to take automatic payments from his account.
Stated Finance Monthly Amount Amount

Method Rate Charge Pmt. Recv. Repaid APR
a. Simple 6% $847.36 $270.76 $8,900 $9.747.36 6%
interest loan
b. Add-on 4.5% $1,201.50 $280.60 $8,900 $10,101.50 8.41%
131
loan
132
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nearby county school systems. One of the rangers, Lloyd Foster,
became so attached to the ideas being presented that he obtained a
leave of absence from his work, persistently promoted the project,
and became Tremont’s first director. Experienced teachers such as
Elsie Burrell and Randolph Shields helped Foster convert talk into
action, rhetoric into experience.
The center soon offered a real alternative to conventional and
overcrowded schools caught in the midst of industrialization.
Teacher-led or parent-supervised classes from a multitude of states
and cities organized themselves, paid a base fee for each member,
and came to the valley for one week during the year. Within months,
Tremont was teaching elementary students at the rate of thousands
per year. The organizers retained their informal, camp-like approach
to interested groups and added to the original dining room and two
dormitories an audiovisual room and a laboratory complete with
powerful microscopes. As the program expanded, children could
fulfill their imaginative promptings in an art room, or build a miniature
skidder in the crafts room, or turn to a library of extensive readings.
As the idea of environmental education at Tremont and elsewhere
spread by word of mouth, volunteers from across the country arrived
and aided those already at work. High school and college students
participated in and still attend weekend conferences on the activities
and the progress of the Center.
They learn, first of all, fundamental concepts that are expressed
simply: “You don’t have to have a lot of fancy buildings to do a good
program,” or “You know, sometimes we teach a lot of theory and we
don’t really get down to—I guess you’d call it the nitty-gritty,” or even
“Now don’t chicken out, the way some of you did last time, step in
the water.”
They learn of “quiet hour,” when, at the beginning of the week, each
child stakes out a spot for himself in the woods, beside the stream,
wherever choice leads. For an hour each day, in sun or rain,
everybody seeks his or her own place and is assured of peace and
privacy. A girl writes a poem to her parents; a fourth-grader
contemplates on a rock by the water; and almost everyone who
observes the quiet
hour looks forward to
it eagerly each day.
Fred R. Bell
In an attempt to capture the spirit
of the old days, a family climbs
about a Cades Cove barn.
Pages 142-143: Members of the Tilman Ownby family
of Dudley Creek, near Gatlinburg, gather for a reunion
in the early 1900s. Many of their descendants still live
in the Smokies area today.
National Park Service
Children anxiously line up to go back a few years with
Elsie Burrell at the one-room schoolhouse in Little
Greenbrier.
Clair Burket
They learn about the highly effective lessons that are scattered
throughout the week, lessons such as “man and water,” “stream
ecology,” “continuity and change.” Imaginative gatherings become
not the exception but the rule: “Sometimes we take a group of
children, divide them into members of a make-believe pioneer family,
and take them up into a wilderness area, an area which is truly
pristine, almost a virgin forest. And we let the kids imagine that they
are this pioneer family, and that they are going to pick out a house
site.” In one game called “succession,” a boy from blacktopped,
“civilized” Atlanta might search along a road for signs of life on the
pavement, then in the gravel, then in the grass, then within the vast,
teeming forest. And a day’s trip to the Little Greenbrier schoolhouse
gives the children of today a chance to experience what it was like
when the Walker sisters and their ancestors sat on the hard wooden
benches and learned the three R’s and felt the bite of a hickory
switch.
It may seem odd that modern children should enjoy so much a trip to
school. But enjoy it they do, for as they fidget on the wooden
benches or spell against each other in an old-fashioned “spelldown”
or read a mid-1800s dictionary that defines a kiss as “a salute with
the lips,” they enter into a past place and a past time. For a few
minutes, at least, they identify with the people who used to be here
in these Smokies—not “play-acting” but struggling to survive and
improve their lives.
The schoolhouse itself is old, built in 1882 out of poplar logs and
white oak shingles. Its single room used to double as a church for
the community, but now the two long, narrow windows on either side
open out onto the protected forest of the park. A woman stands in
the doorway, dressed in a pink bonnet and an old-fashioned, ankle-
length dress. She rings a cast iron bell. The children, who have been
out walking on this early spring morning, hear the bell and begin to
run toward it. Some of them see the school and shout and beckon
the others. In their hurry, they spread out and fill the clearing with
flashes of color and expectation. The woman in the doorway is their
teacher.
They have spanned a century and longer. They now live in more
worlds than one, because they have come to the place where their
spirit lives. It is again homecoming in the Great Smoky Mountains.
Part 3
Guide and Adviser

Traveling in the Smokies
“You can’t get there from here,” an oldtimer might tell you about
traveling in the Smokies, and you might think that’s true when you
get on some of the back roads in the area. But if you stick mostly to
the paved roads and use your auto map and the map in this book,
you should not have much or any trouble finding your way around
Great Smoky Mountains National Park.
The park, which is administered by the National Park Service, U.S.
Department of the Interior, is located along the border between North
Carolina and Tennessee. It can be reached by major highways in
both states and by the Blue Ridge Parkway, which connects the park
with Shenandoah National Park in Virginia. Newfound Gap Road, the
only road that crosses the park, connects Gatlinburg, Tennessee,
with Cherokee, North Carolina. It is closed to commercial vehicles.
There are just a few other roads within the park itself, so travel
between distant points is quite roundabout and time consuming. But
you will see plenty of nice scenery along the way. Because this
handbook focuses on the history of the area, the travel information
does, too. But by no means should you let the limited scope
presented here limit what you do. We encourage you to enjoy the
scenic views, flowers, shrubs, and wildlife as you travel to and
through the historic sites. For example, while you’re in the Cable Mill
area at Cades Cove, you might take the trail to Abrams Falls. It’s a
delightful short hike to a beautiful spot in the park. And if you take
the Roaring Fork Auto Tour, you might hike the 2.4 kilometers (1.5
miles) through a hemlock forest to Grotto Falls. There are plenty of
other short hikes in the park, and when you take them you may
come across decaying ruins of early settlements.
Visitor Centers
Park headquarters and the major visitor center are at Sugarlands,
3.2 kilometers (2 miles) south of Gatlinburg. Other visitor centers are
at Cades Cove and at Oconaluftee, both of which are prime historical
areas in the park. The Sugarlands and Oconaluftee centers are open
8 a.m. to 4:30 p.m. during the winter, with extended hours the rest of
the year. The Cades Cove center, located in the Cable Mill area on
the loop road, is open from 9 a.m. to 5 p.m. from mid-April through
October. Exhibits at the Cades Cove and Oconaluftee centers
feature the human history of the Smokies. The relative flatness of the
Cades Cove area makes this the best place to bicycle in the park.
Walks and Talks
Some of the guided walks and evening programs deal with history.
Check schedules at the visitor centers and campgrounds or in the
park newspaper.
Mountain lifeways and skills are demonstrated periodically from early
spring through October at the Pioneer Farmstead at Oconaluftee,
Cades Cove, Mingus Mill, and Little Greenbrier School. At
Oconaluftee you can walk through a typical Smokies farm and see
many of yesteryear’s household chores being demonstrated. At
Cades Cove, you can see, among other things, how sorghum and
wooden shingles were made. Millers seasonally operate the
gristmills near Oconaluftee and at Cades Cove. All of these
demonstrations indicate that the good old days were not easy ones.
Further Information
For more detailed travel and natural history information, see
Handbook 112, Great Smoky Mountains, in this National Park
Service series. This book and an extensive array of literature about
various aspects of the park are sold at the Sugarlands, Oconaluftee,
and Cades Cove visitor centers by a nonprofit organization that
assists the park’s interpretive programs. For a price list, write to:
Great Smoky Mountains Natural History Association, Gatlinburg, TN
37738.
Specific questions can be addressed to: Superintendent, Great
Smoky Mountains National Park, Gatlinburg, TN 37738. The
headquarters’ telephone number is (615) 436-5615.
Accommodations and Services
You can obtain gasoline, food, lodging, and camping supplies in
most communities near the park in both Tennessee and North
Carolina. Several campgrounds are located in both the park and in
the nearby towns.
Within the park, only LeConte Lodge and Wonderland Hotel offer
accommodations, and they are limited. A half-day hike up a
mountain trail is required to reach LeConte Lodge, which is open
from mid-April to late October. Rustic hotel accommodations and
food service are provided at Wonderland Hotel in Elkmont from June
1 to October 1.
Write to the chambers of commerce in the communities near the
park for general travel advice and for current information on the
availability of lodging facilities.
Safety
While touring the park’s historical sites, stay on the trails, keep
children under control, enjoy the farm animals at a distance, and stay
safely away from the millwheels and other machinery.
While traveling throughout the park, beware of the many black bears
no matter how tame they may appear. If they approach your vehicle,
keep the windows closed. Do not feed the bears!
And keep in mind that the weather can change quickly in the
Smokies and that hypothermia can strike not only in the winter but at
any season. Be careful not to become wet and/or chilled. Carry extra
clothing.
See Handbook 112, Great Smoky Mountains, for more precautions
and information about the black bear, hypothermia, and other
dangers.
Regulations
Roads within the park are designed for scenic driving, so stay within
the speed limits and be alert for slow vehicles and for others exiting
and entering. Pull off the roads or park only at designated areas.
Gasoline is not sold in the park, so be sure to fill your tank before
heading on a long trip.
Do not leave valuables inside a locked car where they can be seen.
Leave them home, take them with you when you leave your vehicle,
or lock them in the trunk.
Hunting is prohibited in the park. Firearms must be broken down so
they cannot be used. The use of archery equipment, game calls, and
spotlights also is prohibited.
All plants, animals, and artifacts are protected by Federal law here.
Do not disturb them in any way. Fishing is permitted subject to state
and Federal regulations and licensing.
All overnight camping in the backcountry requires a backcountry
permit. Otherwise, camp and build fires only in designated
campground sites.
We suggest that you do not bring pets. They are permitted in the
park but only if on a leash or under other physical control. They may
not be taken on trails or cross-country hikes. Veterinary services are
found nearby. If you want to board your pet during your stay here,
check with the nearby chambers of commerce.
Oconaluftee
At the Pioneer Farmstead in Oconaluftee you can get

a glimpse of what daily farm life was like in the
Smokies. Besides the ongoing kitchen tasks, chores
included tending cows and chickens, cutting and
stacking hay, building and repairing barns and
wagons, and a thousand other things.
Self-sufficiency and individuality were strong traits in the Smokies.

Each person had to do a variety of tasks, and each family member
had to help or complement the others. Just as Milas Messer (see
pages 90-91) exemplified these traits personally, the Pioneer
Farmstead at Oconaluftee on the North Carolina side of the park
represents them structurally. Various buildings have been brought
here to create a typical Smokies farmstead on the banks of the
Oconaluftee River.
In the summer and fall farm animals roam about the farmstead and a
man and a woman carry out daily chores to give you an idea of what
the pioneers had to do just to exist. At first these Jacks- and Jills-of-
all-trades had no stores to go to. They made their own tools, built
their own houses and barns and outbuildings, raised their own food,
made their own clothes, and doctored themselves, for the most part.
The log house here is a particularly nice one, for John Davis built it
with matched walls. He split the logs in half and used the halves on
opposite walls. The two stone chimneys are typical of the earliest
houses. Davis’ sons, then 8 and 4, collected rocks for the chimneys
with oxen and a sled.
Behind the house is an essential building, the meathouse. Here
meat, mostly pork, was layered on the shelf at the far end and
covered with a thick coating of salt. After the meat had cured, it was
hung from poles, which go from end to end, to protect it from
rodents. In the early years especially, bear meat and venison hung
alongside the pork.
Apples were a big part of the settlers’ diet in a variety of forms: cider,
vinegar, brandy, sauces, and pies. And of course they ate them, too,
right off the tree. The thick rock walls on the lower floor of the apple
house protect the fruit from freezing in winter. The summer apples
were kept on the log-wall second floor.
The Indians’ maize, or corn, was the most essential crop on the
typical Smokies farmstead. Besides being used as food for livestock,
it was the staple for the pioneers themselves. With corn they made
corn bread, hoe cakes, corn meal mush, and even a little
moonshine. The harvested crop was kept dry in a corncrib until used.
As the pioneers became more settled and turned into farmers, they
built barns to provide shelter for their cows, oxen, sheep, and
horses, plus some of their farming equipment and hay. The large, log
barn at the Oconaluftee Farmstead is unusual. It is a drovers’ barn—
a hotel for cattle and other animals driven to market. The barn is
located close to its original site.
Most farmers had a small blacksmith shop where
they could bang out a few tools, horseshoes,
hinges, and, later on, parts for farm machinery.
These structures were not very sophisticated; they
just had to provide a little shelter so the fire could
be kept going and to protect the equipment—and
to keep the smith dry—during inclement weather.
The springhouse served not only as the source of
water but as a refrigerator. Here milk, melons, and
other foods were kept, many of them in large
crocks. The water usually ran through the
springhouse in one half of a hollowed out log, or in
a rock-lined trench. On hot, muggy days, a child
sent to the springhouse for food or water might
tarry a moment or two to enjoy the air conditioning.
The farmstead is open all year, but the house is
open only from May to November.
Cades Cove
The Methodist Church, Cable Mill, and Gregg-Cable
house are just three of the many log or frame
structures still standing in Cades Cove today.
Just as Oconaluftee represents self-sufficiency and individuality,
Cades Cove illustrates those traits, plus something else: a sense of
community. Here individuals and families worked hard at eking out a
living from day to day, but here, too, everyone gathered together
from time to time to help harvest a crop, raise a barn, build a church,
and maintain a school. The structural evidence of this helping-hand
attitude still stands today in Cataloochee (see pages 154-155) and in
Cades Cove.
At its peak in 1850, Cades Cove had 685 residents in 132
households. A few years after that the population shrank to 275 as
the soil became overworked and as new lands opened up in the
West. Then the population rose again to about 500 just before the
park was established.
The State of Tennessee had acquired this land in 1820 from the
Cherokees and then sold it to speculators, who in turn sold plots to
the settlers. They cleared most of the trees and built their houses at
the foot of the surrounding hills. Corn, wheat, oats, and rye were
raised on the flat lands, whereas the slopes were used for pastures,
orchards, and vegetable gardens. The Park Service leases some of
the land here today to farmers to keep the cove open as it was in the
early settlement days.
In Cades Cove you will find some of the finest log buildings in
America. Some are original; the others come from elsewhere in the
park. The first log house on the 18-kilometer (11-mile)-loop-road tour
belonged to John and Lurena Oliver, who bought their land in 1826.
Their cabin, with its stone chimney and small windows, is typical of
many in the Smokies, and it remained in the Oliver family until the
park was established. A stone in the Primitive Baptist Church
cemetery just down the road commemorates John and Lurena, the
first permanent white settlers in the cove. The church was organized
in 1827, and the log building was used until 1887, though the
members, who were pro-Union, felt they had to shut it down during
the Civil War because of strong rebel sentiment.
The Methodist Church supposedly was built by one man, J. D.
McCampbell, in 115 days for $115, and after he was done he served
as its preacher for many years. The frame Missionary Baptist Church
was built in 1894 by a group that split from the Primitive Baptists in
1839 because it endorsed missionary work.
Elijah Oliver’s log house may well be one of the first split-levels. The
lower kitchen section off the back formerly was the home of the
Herron family and was brought here and attached to the main house.
This is a good place to see some of the many auxiliary structures
most families had: springhouse, barn, and smokehouse.
Many families also had a tub mill with which they could grind a
bushel of corn a day. When they had more corn to grind, they would
take it to a larger mill, such as John Cable’s. His was not the first
waterwheel mill in Cades Cove, but it is the only remaining one
today. It has been rehabilitated a few times, but the main framing,
the millstones, and some of the gears are original.
In the Cable Mill area are several other structures that have been
brought here from other parts of the park. Among them is the Gregg-
Cable house, possibly the first frame house in Cades Cove. It was
built by Leason Gregg in 1879 and later became the home, until her
death in 1940, of Becky Cable, John’s daughter. At different times
the house served as a store and a boardinghouse. The blacksmith
shop, barns, smokehouse, corncrib, and sorghum mill are
representative of such structures in the Smokies.
Heading east from the mill area, you come to the Henry Whitehead
and Dan Lawson places. At both you can see some of the best log
work, inside and out, within the park, and both have brick instead of
stone chimneys. These houses represent the transition between the
crude log house and the finer log house. Further down the road is
“Hamp” Tipton’s place, where you can see an apiary or bee gum
stand. Honey, sorghum, and maple syrup were common sweets for
folks in the Cove.
The last house on the loop road is the Carter Shields place, a one-
story log house with loft. This cabin is about the average size of
Smokies cabins, but it is a bit fancier than most with its beaded
paneling in the living room and a closed-in stairway.
The buildings in Cades Cove are open all year except for the
churches and a few other structures.

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Personal Financial Planning 13th

Edition Gitman Solutions Manual

Using Consumer Loans

7. Consumer loans may have various provisions, including collateral requirements,

Answers to Concept Check Questions

d. As a personal loan. This type of credit is used to make expenditures for

e. As a consolidation loan. These loans are used to straighten out an unhealthy

7-4. Borrowing as little as possible is an upfront strategy on student loans. A student

Loan Repayment Assistance programs. There may also be an option to consolidate

7-6. a. Consumer finance companies—A consumer finance company, often called a

b. Sales finance companies—A sales finance company provides installment

Captive finance companies—Captive finance companies, such as General Motors

• Finance charges (APR)—how much are you going to have to pay?

Financial Planning Exercises

2. The Auto Boss deal total cost:

$3,500.00 down + (60 × $265.02) = $3,500 + $15,901.20 = $19,401.20

Outstanding Monthly Interest Principal Balance

Outstanding Monthly Interest Principal Balance

Finance charge = Principal × 6.5% × 1.5 years

Amount requested – interest = loan proceeds received

APR = ($97.50/1.5) = $65 = 6.5%

The APR for the discount method is found in a similar manner:

APR = ($97.50/1.5) = $65 = 7.2%

8. a. FS = $10,000 × .07 × 5 = $3,500.

b. Monthly payment = ($10,000 + $3,500)/60 = $225.00

c. Payments under the simple interest method (determined using a calculator or

9. Using the financial calculator, set on End Mode and 12 payments/year:

[(1 + .010010)^12] – 1 = 1.1270 – 1 = 12.70% APR

b Outstanding Monthly Interest Charges Principal

3 $19,395.67 $368.33 $64.65 $303.68

c. ($368.33 × 60) = $22,099.80 − $20,000 = $2,099.80

d. [(1 + .04/12)^12] − 1 = (1.0033)^12 − 1 = 1.0403 − 1 = 4.03%

Finance Charge using Add-On Method = Principal × Rate × Time

FS = $5,000 × 0.075 × 3 = $1,125

b. The monthly payment on the loan is:

$5,000 + $1,125 = $170.14

Problem 13a—Worksheet 7.2

Problem 13b—Worksheet 7.2

Payment = $6,400 + $1,664 = $8,064 = $168

Solutions to Critical Thinking Cases

1. With the North Carolina State Bank discount interest loan:

a. Anita would receive initial proceeds of $26,400 calculated as follows:

Principal Amount $30,000

b. At maturity, Anita would be required to repay the $30,000 principal.

Total finance charges = ($9.747.36 – $8,900) = $847.36

Monthly payments = $8,900 + $1,201.50 = $10,101.50 = $280.60

Stated Finance Monthly Amount Amount

Guide and Adviser

At the Pioneer Farmstead in Oconaluftee you can get

Self-sufficiency and individuality were strong traits in the Smokies.

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