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7. Calculating finance charges using the discount method and APRon a single-payment loan

You are taking out a single-payment loan that uses the discount method to compute the finance charges. Computing the finance charges is done the way theyre computed using the simple interest method. Under the discount method, a borrower receives the principal the finance charges. For example, if the principal is $6,000 and the finance charges are $480, the borrower will receive $ .

The following equation computes the finance charges on your loan:

FdFd = FsFs = P r t

In the equation, FdFd is the finance charge for the loan. What are the other values?

P is the amount of the loan.

r is the stated rate of interest.

t is the term of the loan in .

Youre borrowing $4,000 for two years with a stated annual interest rate of 4%. Complete the following table. (Note: Round your answers to the nearest dollar.)

Principal	$4,000
Finance charges
Loan disbursement
Total payback

Annual Percentage Rate (APR)

You also want to calculate the APR (annual percentage rate) and compare it to the stated interest rate.

APRAPR

= =

Average Annual Finance ChargeAverage Loan Balance Outstanding Average Annual Finance ChargeAverage Loan Balance Outstanding

First, compute the average annual finance charge by dividing the total finance charge of

by the life of the loan, which is two years (2.0 years) =

(Note: Round your answers to the nearest dollar.)Next, as a single-payment loan, the average loan balance outstanding is constant at the , in this case,

.

Complete the calculation. (Note: Round your answers to the nearest dollar and your percentage point to the nearest two decimal places.)

APR	=	Average Annual Finance Charge / Average Loan Balance Outstanding
	=	/
	=	%

The APR is the stated interest rate because the

Formula to compute finance charges is the same for the discount and simple interest methods

Term of the loan is more than six months

Loan is a single-payment loan

Discount method was used to calculate finance charges