Peg Gasperoni bought a $50,000 life insurance policy for $340 per year. Ryan Life Insurance Company sent her the following billing instructions along with a premium plan example: "Your insurance premium notice will be mailed to you in a few days. You may pay the entire premium in full without a finance charge or you may pay the premium in installments after a down paymer and the balance in monthly installments of $85. The finance charge will be added to the unpaid balance. The finance charge is based on an annual percentage rate of 18%." If the total policy premium is: $340 $440 $540 And you put down: $85.00 $105.00 $130.00 The balance subject to finance charge will be: $255.00 $335.00 $410.00 The total number of monthly installments ($30 minimum) will be: 3 4 5 The monthly installment before adding the finance charge will be: $85.00 $85.00 $85.00 The total finance charge for all installments will be: $8.03 $12.81 $18.84 And the total deferred payment price will be: $348.03 $452.81 $558.84 Peg feels that the finance charge of $8.03 is in error. Check your answer. a. What is the actual finance charge for the first three months? (Round your answer to the nearest cent.) Finance Charge $ b. Is she correct?

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Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.