909

How much interest are you paying on your student loans? When will they eventually be paid off? How much will they eventually cost you?

In the preceding chapter, we looked at consumer financial models for saving and formulas for calculating the amount accumulated. Savings or investments would not earn interest unless they could be loaned to someone to make productive use of the money.

In this chapter, we examine the other side of consumer finance: borrowing. You may have a student loan, you will probably need to borrow (or have already borrowed) to buy a car, you will almost certainly borrow if you buy a house or apartment, and you are borrowing if you use a credit card. For any such loan, you pay “finance charges,” which include interest and perhaps other “fees” as well. We investigate and compare some common kinds of loans.

910

We begin by (re)acquainting you briefly with simple interest and compound interest, in the contexts of student loans and credit cards. “Conventional” loans, such as the mortgage on a house, use the savings formula from Chapter 21 to calculate the monthly payment. Finally, we consider annuities, a way to provide income security in retirement.

If you have a grasp of the ideas behind compound interest and can use the compound interest formula (page 911) and the savings formula (page 915), you can proceed with this chapter without first reading Chapter 21.