kingnothing999
Member
- Joined
- Feb 18, 2008
- Messages
- 53
- Gender
- Male
- HSC
- 2009
hey can someone help me with this question please???
i really dont know where to start...
we are suppose to do it on excel =S I've had a go at it but im not sure if im right so i just want to know what other people's perspectives are/how they work it out.
anyways here is the problem:
Background information:
Credit Card Companies normally charge very high interest rates particularly on cash advances (there is no grace period for cash advances). This interest is applied daily but for simplicity monthly application is used in this case study. The repayment amount is calculated differently to other forms of loans. The repayment amount on a credit card debt balance is calculated in one of two ways. The traditional way of calculating minimum repayment is multiplying a fixed rate (e.g. 2%) to the outstanding balance on the credit card. The minimum repayment calculated in this way, includes the interest charged on the balance. The part of the minimum repayment amount which is not interest, is deducted
from the debt balance to get the new outstanding balance for the next period. The other method of calculating the minimum repayment is by multiplying the debt balance by a fixed rate (e.g. 1%) and then adding the interest on the remaining balance to find the total minimum repayment for each period. The rate used for calculating the minimum repayment, is different from one company to another. The repayment amount on other loans such as home loan is calculated using annuity formula which means the repayment amount will be a fixed amount for the duration of the loan. The interest however is applied in a similar way. For each period, periodic interest is applied to the outstanding balance. Therefore part of the repayment is the payment of
interest on the balance and the remainder reduces the principal.
Problem:
You are 22 years old. You applied for a credit card 3 years ago as soon as you found a job as an assistant manager in a local store paying you $45,000 per year. You have been using your credit card over the last 3 years to pay for some of your living costs and you have accumulated a large debt on your credit card. You have been paying the minimum repayment amount required by your credit card statements at the end of each month but you feel like your debt balance is not going down much so you have decided to stop using your credit card until you have fully repaid your debt on it. You decide to fully pay your credit card debt by making the required minimum repayments at the end of each month. The minimum repayment per month is calculated as 3% of your credit card debt balance at the beginning of each month. You currently owe a total of $4,000 on your credit card and the interest rate charged to your debt is 18% per annum. Your credit card company does not charge you an annual fee or any other charges except the interest. Later when you are discussing your decision with one of your friends who has a finance degree, he suggests another way of repaying your debt. He suggests that you borrow $4,000 of personal loan from your local bank and use that money to fully repay your credit card debt. You then repay your personal loan over a 3 year period by making monthly repayments as calculated for you by the bank. You go to your local bank and
find out that the interest rate on personal loans is also 18% per annum compounded monthly.
You decide to use excel to find out which of these two options is better for you.
Questions:
1. Prepare a repayment schedule to show the monthly minimum repayment, the
amount of interest paid each month, and the balance of your debt at each period, if you take your own option of paying the minimum repayment amount on your credit card each month. (8 marks)
2. Prepare a repayment schedule to show the monthly repayment amount, the amount of interest paid each month, and the balance of your debt each period, on the personal loan, if you decide to take that option. (8 marks)
hope you guys can help out!
thanks
i really dont know where to start...
we are suppose to do it on excel =S I've had a go at it but im not sure if im right so i just want to know what other people's perspectives are/how they work it out.
anyways here is the problem:
Background information:
Credit Card Companies normally charge very high interest rates particularly on cash advances (there is no grace period for cash advances). This interest is applied daily but for simplicity monthly application is used in this case study. The repayment amount is calculated differently to other forms of loans. The repayment amount on a credit card debt balance is calculated in one of two ways. The traditional way of calculating minimum repayment is multiplying a fixed rate (e.g. 2%) to the outstanding balance on the credit card. The minimum repayment calculated in this way, includes the interest charged on the balance. The part of the minimum repayment amount which is not interest, is deducted
from the debt balance to get the new outstanding balance for the next period. The other method of calculating the minimum repayment is by multiplying the debt balance by a fixed rate (e.g. 1%) and then adding the interest on the remaining balance to find the total minimum repayment for each period. The rate used for calculating the minimum repayment, is different from one company to another. The repayment amount on other loans such as home loan is calculated using annuity formula which means the repayment amount will be a fixed amount for the duration of the loan. The interest however is applied in a similar way. For each period, periodic interest is applied to the outstanding balance. Therefore part of the repayment is the payment of
interest on the balance and the remainder reduces the principal.
Problem:
You are 22 years old. You applied for a credit card 3 years ago as soon as you found a job as an assistant manager in a local store paying you $45,000 per year. You have been using your credit card over the last 3 years to pay for some of your living costs and you have accumulated a large debt on your credit card. You have been paying the minimum repayment amount required by your credit card statements at the end of each month but you feel like your debt balance is not going down much so you have decided to stop using your credit card until you have fully repaid your debt on it. You decide to fully pay your credit card debt by making the required minimum repayments at the end of each month. The minimum repayment per month is calculated as 3% of your credit card debt balance at the beginning of each month. You currently owe a total of $4,000 on your credit card and the interest rate charged to your debt is 18% per annum. Your credit card company does not charge you an annual fee or any other charges except the interest. Later when you are discussing your decision with one of your friends who has a finance degree, he suggests another way of repaying your debt. He suggests that you borrow $4,000 of personal loan from your local bank and use that money to fully repay your credit card debt. You then repay your personal loan over a 3 year period by making monthly repayments as calculated for you by the bank. You go to your local bank and
find out that the interest rate on personal loans is also 18% per annum compounded monthly.
You decide to use excel to find out which of these two options is better for you.
Questions:
1. Prepare a repayment schedule to show the monthly minimum repayment, the
amount of interest paid each month, and the balance of your debt at each period, if you take your own option of paying the minimum repayment amount on your credit card each month. (8 marks)
2. Prepare a repayment schedule to show the monthly repayment amount, the amount of interest paid each month, and the balance of your debt each period, on the personal loan, if you decide to take that option. (8 marks)
hope you guys can help out!
thanks
