Extending Chapter 6: The Cost of Debt

What You'll Do and Learn

• You'll extend your knowledge of financing purchases through borrowing by calculating the interest cost of loans.
• You'll learn how to use Standard & Poor's online calculators to help you evaluate financing alternatives.

Introduction

In this activity you will learn about using an online calculator to estimate the total interest cost of a loan and to compare costs for different types of loans.

Chapter Notes

In Chapter 6 you learned about different types of consumer loans and how to build a credit history. Several different types of loans are installment loans, revolving credit lines, and mortgage loans. Installment and mortgage loans are repaid over a specific period of time by making regular payments, usually monthly, of a set amount. Revolving credit lines, including department store credit cards and bank cards, require that only a minimum payment be made each month--usually 2 percent of the total balance outstanding.

Interest rates on installment loans are typically lower than the rates charged on revolving credit. Also, in many cases the minimum payment required on a revolving credit line is only slightly higher than the monthly interest charge. If you pay only the minimum amount due each month, it may take you years to eliminate your balance, and your total interest costs could end up being several times the amount originally borrowed.

Before using credit to finance your purchases, it's a good idea to look for the most cost-effective loan available and to plan to repay the loan as soon as possible.

Site Notes

Standard & Poor's offers several tools that can help you make decisions about managing your money. Among these is an online calculator that you can use to calculate the total interest cost that you will pay on a loan.

Let Me Try

Go to the S&P site at and then print the Worksheet activity.

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