How to Calculate Finance Charges for Installment Purchases?

When making a purchase through installment payments, it is essential to understand how finance charges are calculated. These charges represent the cost of financing the purchase over time and can significantly impact the total amount paid.

The first step in calculating finance charges is to find the remaining balance after any initial payment. This is done by subtracting the down payment from the total purchase price. In the case of Cari's car stereo, he made a $41 down payment on a $276 stereo, leaving a balance of $235 to be financed.

After determining the remaining balance, the next step is to apply the finance charge percentage. In Cari's case, the finance charge was 15%. To calculate the finance charge, you need to multiply the remaining balance by this percentage. By multiplying $235 by 15/100, you get a finance charge of $35.25.

Understanding how finance charges are calculated is crucial for making informed financial decisions when opting for installment purchases. By knowing the total cost involved, consumers can better assess their budget and plan for future payments accordingly.