Question

1.) Explain how to calculate the amount financed, finance charge, and APR by table lookup. Do you think the Truth in Lending Act should regulate interest charges?

 

Answer 1

(1)

The amount financed is calculated by deducting the down payment from the cash price of the product or service. Cash price is the price to be paid. in case the entire payment is made at the time of purchase.

Amount financed = Cash price - Down payment

When a product or service is purchased in instalments. the sum of all the monthly payments would include the amount financed and the finance charges.

Therefore,

Finance charge = Sum of all monthly payments - Amount financed

Calculate the annual percentage rate (APR) by using table lockup as per the following steps:

• Step 1

Divide the finance charge by amount financed. Multiply the resulting answer by 5100 and obtain the table factor.

• Step 2

In the APR table. locate the column 'number of payments'.

• Step 3

Scroll horizontally along the row for the 'number of payments' and identify two closest numbers between which the table factor identified in step 1 lies. Depending on the accuracy desired. the APR value can be interpolated using the two closest numbers.

The purpose of the Truth in Lending Act is to make the consumer fully aware of the interest charges and the true cost of credit Once the customer is fully aware of the cost of credit, is free to make his choice. The Truth in Lending Act enables removal of the opaqueness and ambiguity in credit terms. so that consumers can make an informed choice. The Act rightly has no role in regulating interest charges.