Basic HTML Version
Q
uantitative
R
easoning &
P
roblem
S
olving
376
© 2014 Pacific Crest
M
athematical Language
Terms and notation
amortization
— The gradual elimination of a mortgage or other loan, by regular payments over a
specified period of time determined by an “amortization schedule”
collateral
— Something of value that you will forfeit to the lender if you do not pay back the loan
under the terms of the loan contract
credit
—An agreement where you obtain something of value now in exchange for a promise to pay later
credit card
—A plastic card which allows you to purchase something now with your promise to pay
later
credit score
—An assessment of a person’s credit worthiness by a rating agency. Scores range from
300 to 900. Higher credit scores (>650) may be reflected in obtaining lower interest rates.
debit card
— A plastic card which allows you to purchase something now and money is transferred
immediately from your bank account to the seller
debt to income ratio
— A number (debt
÷
income, written as a percent) that is nearly as important
as your credit score in obtaining additional loans or credit. Lenders like to see this number as low
as possible, but at most 36%. The lower the ratio, the more likely you are to receive a loan or credit.
default
— Failure to meet a financial obligation, such as a loan or mortgage
down payment
— The amount of money you pay as part of your loan contract to show your
commitment to pay back the loan (on your house or car). The down payment will be forfeited to the
lender if you fail to meet the terms of the loan contract.
loan
— The amount of money that is borrowed
minimum payment
—The amount that a borrower is required to pay each month on a credit purchase.
It includes the interest due plus an amount determined by the lender (perhaps a flat amount or a small
percentage of the remaining balance)
mortgage
—A loan for purchasing a house or property, usually with specified payment periods (i.e.,
monthly) and interest rates. The lender has the right to repossess the property if the borrower defaults
(doesn’t pay) on the loan.
M
ethodology
C
alculating
the
C
ost of
C
redit
Scenario:
You are buying a $22,000 car and you make a $2000 down payment. You finance
the remaining cost over 5 years at a 9% annual interest rate. Determine your
monthly payment and the actual total amount you will have paid for the car. State
the cost of credit in this situation.
Step
Explanation
1.
Determine values of the
variables,
L,
r
,
n
,
PMT
L
is the amount of the loan,
r
is the interest rate,
n
is the number of
equal payments to be made, and
PMT
is the amount of each payment
WATCH
IT WORK!
.09
$20000,
.0075,
5 12 60,
is to be determined.
12
L
r
n
PMT
=
= =
=
=