Lesson 3: Installment Credit
Handout 1

Buying on the Installment Plan

Interest Formula

Interest = Principal x Interest Rate x Time (in years)

Example 1: Arthur wants to buy an entertainment center. The cash price is $2850. It can also be purchased in 24 monthly payments of $140 each, with a down payment of $250. How much interest would he pay if he purchased the item on the installment plan? 

Total price  = Down payment + Monthly payment total
                     = $250 + (24 x $140)
                     = $3610

Interest        = Total amount paid – Cash price

                     = $3610 – $2850
                     = $760
 
Example 2: Find the interest rate?
 
Principal      = Full installment price – Down payment
                     = $3610 – $250
                     = $3360
 
Interest Rate       = Interest / Principal x Time
                             = $760 / $3360 x 2
                             = 11.3%