Accounting and Finance Foundations

Unit 2

Accounting and Finance Foundations Unit 2: Accounting and Finance Math Workshop 139

Accounting and Finance Math Workshop

Lesson 5.3 Installment Plans

Student Guide

When buying on an installment plan, you are borrowing money and paying it back in part payments. You

may have to make a down payment. You may also have to sign an installment contract in which you agree

to pay the unpaid balance. The installment price is higher than the cash price because the seller adds a

finance charge to the cash price. This charge pays the seller interest on the money and covers the extra

cost of doing business on the installment plan. The finance charge is the difference between the installment

price and the cash price.

Example

A desktop computer system has a cash price of $1,600. To buy it on the installment plan, you pay

$100 down and $40 a month for 48 months. Find the finance charge. By what percent is the install-

ment price greater than the cash price?

Solution

$40 x 48 = $1,920 (total monthly payment)

$1,920 + $100 = $2,020 (installment price)

$2,020 – $1,600 = $420 (finance charge)

Divide the finance charge by the cash price to find the percent that the installment price is greater

than the cash price.

$420 / $1,600 = .2625 or 26.25% greater

Example

The installment price of a set of water skis is $190. You must pay $50 down and make payments

for 16 months. What will your monthly payments be?

Solution

$190 – $50 = $140 (remainder to pay)

$140 / 16 = $8.75 (monthly payment)

5.3–5.6 Installment Plans, Sales Tax, Sales Receipts, and Cash Discounts

*   Business    Tip:    For installment loans,  there   are many    loan    calculators on  the web.    You enter   principal,  

annual  interest    rate,   and time    of  the loan.   It  will    calculate   the monthly payment amount. Search  for 

“loan calculator.”

After researching vehicle prices, go online and practice using a loan calculator. Enter the amount you

would borrow, the interest rate (use several given by your teacher) and the duration of the loan in months

(60 months for a 5-year loan).

SOURCE: Hansen, M. (2010). Business math (17th ed.) [pp. 185-186]. Mason, OH: South-Western Cengage Learning

Chapter 5