Grade 5 Lesson #7

How do you calculate interest? How do loan terms impact the borrower?

SS.8.FL.4.1 Explain that people who apply for loans are told what the interest rate on the loan will be. An interest rate is the price of using someone else’s money expressed as an annual percentage of the loan principal.

Correlated Literacy Standard:

LAFS.5.W.3.8: Recall relevant information from experiences or gather relevant information from print and digital sources; summarize or paraphrase information in notes and finished

SS.8.FL.4.1:Explain that people who apply for loans are told what the interest rate on the loan will be. An interest rate is the price of using someone else’s money expressed as an annual percentage of the loan principal

Bank Loans

Grade 5 Lesson #: 7

Correlated Florida Standards (See Full Text on Cover Page)

  • LAFS.5.W.3.8
  • MAFS.5.

Essential Questions

  • How do you calculate interest?
  • How do loan terms impact the borrower?

Learning Goals/Objectives

Students will:

  • Understand how banks operate
  • Identify different types of loans
  • Describe how loan terms differ
  • Calculate interest

Overview

Students will learn about how banks impact the community through the services they provide. They will explore how banks loans operate, including how to calculate interest and analyze loan terms carefully in order to decide which type of loan best suits their needs.

Materials

  • Computer or Tablet
  • Digital Whiteboard
  • PowerPoint Presentation (Included in Lesson 7 File)
  • Handout: Bank Loans (Included)

Time

  • 30 minutes

Activity Sequence

INTRODUCTION/HOOK (2minutes)

Display Powerpoint Presentation. Read and iscuss slides 1 and 2 with students

Discuss slides 2-3.

  • Say: Today we will explore how banks work in an effort to understand how loan terms impact the borrower. We will also practice c
  • Do: Have students analyze the cartoon about types of mortgage loans. Have students identify what is humorous about this cartoon. Select volunteers to share.

ACTIVITY (26 minutes)

  1. Discuss slides 4-7 (8 minutes)
  • Say: Few Americans can afford to pay cash for their car or home. Cars and homes are very expensive. The average price of a new car starts at about $20,000 while the average price of a home can range anywhere from $150,000 to millions of dollars. Banks make it possible for us to make such purchases now and repay over time. The more money you borrow, the more time it will take you to pay back the loan. Cars are usually repaid within five years and homes take upwards of thirty years.
  • Say: Banks began a very long time ago – about the time when Columbus was sailing to America. The word “bank” comes from the Italian word “banco” which means bench. Moneylenders sat on benches in the marketplace and waited there to do business with other people.
  • Do: Have students compare and contrast early banks with banks today.
  • Say: Banks are businesses that provide a service in the community. People use banks for two main purposes – to save money and borrow money. When somebody borrows money from the bank, the transaction is called a loan. Borrowing money is not free. The price you pay for borrowing money is known as interest. Banks charge you a percentage of the amount borrowed. Banks also pay interest to patrons who save their money there. Do you think banks pay more interest for saving money or charge more interest borrowing money? Why?
  • Do: Explain to students that patrons must charge more interest than they provide in order to stay in business as banks are lending the money they collect from patrons.
  • Say: Banks lend money to people who want to start up new businesses, expand existing businesses, make improvements to their homes or buy large items such as houses and cars. The spending generated in this way provides income for business owners and workers. Business owners and workers thus are able to spend or save money, and the money they spend and save provides more income for other people and more money for banks to lend.
  1. Discuss slides 8-11. (8 minutes)
  • Do: Guide students through understand the common loan repayment terms for automobiles, homes, education, and refinance loans. Explain to students that the longer it takes them to pay back the loan the more interest they will pay over time.
  • Say: It’s important to understand your loan terms when borrowing money. Annual Percentage Rate (APR) is the amount of interest you will pay annually. Look at the true cost of borrowing of each of the three loans below. What do you notice?
  • Auto Loan Scenario: Notice that you will make 48 payments of $460.59 paying a total of $2,108.12 in interest over the span of the loan. That means that even though you borrowed $20,000 you will end up having to repay the bank $21,198.12.
  • Home Loan Scenario: Notice how much interest you end up paying by the end of your loan for borrowing $200,000.
  • Student Loan Scenario: This scenario shows us that it will cost us nearly $30,000 to borrow $50,000 to pay for school. These scenarios illustrate how banks make their money.
  • Say: When shopping for a loan, you need to carefully consider the loan terms as they greatly your monthly payments and final cost. Let’s do some math to help us analyze two loan scenarios and decide which is the best option.
  • Do: Walk students through calculating the repayment terms of both loan options A and B. Explain to them that although in Option A you end up paying the least amount of interest, the monthly payment is higher than in Option B. Though we’d prefer to pay the least amount of interest possible, sometimes that is not possible because we cannot afford the higher monthly payments.
  • Say: It’s important to note that as you decrease the principal amount owed, your interest fees will decrease as well. Remember interest is calculated based on the current amount you owe. A loan amortization calculator is a great tool to use to help you analyze your loan terms. There are many available online. Note what happens to the interest charged and principal balance over time.
  1. Distribute loan handout and display slide 12. (10 minutes)
  • Do: Distribute Bank Loans handout and keep slide 13 displayed as a reference for students to use while completing handout.
  • Scenario 1: You borrow $10,000 for a used car at 5% interest for 3 years.
  • Scenario 2: You borrow $80,000 to buy an apartment at 3% interest for 15 years.
  • Scenario 3: You borrow $30,000 to buy a new boat with at 4% interest for 10 years.
  • Scenario 4: You borrow $400 to buy a PS4 from your parents at 0% interest for 2 years.

CLOSURE (2 minutes)

  • Revisit cartoon about types of mortgage loans and essential question. Have students discuss how their understandings about banks and loans have changed. Encourage students to support their answers with evidence from the lesson.

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING

  • Have students research car loan options and prepare an oral presentation comparing three loans and explain which option is the best for them.
  • Have students conduct an interest rate scavenger hunt for the lowest interest rate for home loans or car loans.

SOURCES/BIBLIOGRAPHIC RESOURCES THAT CONTRIBUTED TO THIS LESSON

Lesson Content adapted from: The History of Banking and Saving

Article and video with suggestions on how to help kids understand how loans work:

Page 64 of Hands on Banking guide has lesson ideas and activities on interest

Name ______Date ______
Bank Loans
Step 1: Calculate the APR
(Amount borrowed x the APR)
Step 2: Multiply the APR by the number of years.
(APR x years)
Step 3: Add this amount to the cost of the loan.
(Interest + amount borrowed)
Step 4: Divide by the total amount owed by number of months financed to calculate your approximate monthly payments.
(Total amount owed / number of months) /
1. You borrow $10,000 for a used car at 5% interest for 3 years. / 2. You borrow $80,000 to buy an apartment at 3% interest for 15 years. / 3. You borrow $30,000 to buy a new boat with at 4% interest for 10 years. / 4. You borrow $400 to buy a PS4 from your parents at 0% interest for 2 years.
APR:
Total Interest:
Total Cost of Loan:
Monthly Payments: / APR:
Total Interest:
Total Cost of Loan:
Monthly Payments: / APR:
Total Interest:
Total Cost of Loan:
Monthly Payments: / APR:
Total Interest:
Total Cost of Loan:
Monthly Payments:

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