A contractor bids $45,000 for a kitchen remodel but the final cost is $52,000 due to change orders. What is the maximum finance charge the contractor can collect if offering payment terms?
Correct Answer
C) $780
B&P Code Section 7159.10 limits finance charges to 1.5% per month on the unpaid balance. Maximum annual rate is 18%, so 1.5% of $52,000 = $780 per month maximum.
Why This Is the Correct Answer
B&P Code Section 7159.10 limits finance charges on home improvement contracts to a maximum of 1.5% per month on the unpaid balance. The final contract value after change orders is $52,000. Applying 1.5%: $52,000 × 0.015 = $780 per month maximum. The question asks for the monthly maximum based on the final contract amount.
Why the Other Options Are Wrong
Option A: $1,560
$1,560 would represent 3% of $52,000 or 1.5% applied incorrectly at an annual rather than monthly rate divided by a different period. The correct monthly rate is 1.5% of the final contract amount, not double that.
Option B: $520
$520 would equal 1% of $52,000, or 1.5% of a lower base (e.g., the original $45,000 bid minus some adjustment). The finance charge must be applied to the final contract value ($52,000), not the original bid.
Option D: $1,040
$1,040 equals 2% of $52,000. The statutory maximum is 1.5%, not 2%. This option tests whether candidates know the exact rate cap.
Memory Technique
Remember '1.5% per month' as the home improvement finance charge cap. Think: 'one and a half percent per month = 18% per year.' Apply it to the FINAL amount (after change orders), not the original bid. Change orders are binding additions to the contract.
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