I am borrowing $10,000 for 5 years at 9%. payments, which are made on a monthly basis, are determined using the add-on method. 1. how much total interest will i have to pay on the loan if it is held for the full 5 year term. 2. what are my monthly payments. 3. how much higher are the monthly payments under the add-on method under the simple interest method?
1. P = (Po*r*t)/(1-(1+r)^-t)
r = (9%/12)/100% = 0.0075 = Monthly % rate expressed as a decimal.
t = 12mo/yr * 5yrs. = 60 Months.
Plug th above values into the givenEq and get:
P = $12,455.01
I = P-Po
2. Monthly = P/t
3. P = Po + Po*r*t
Po = $10,000
r = 0.0075
t = 60 Months
Plug the above values into the given Eq
and get:
P = $14,500
Monthly = P/t
To solve these questions, we need to understand how the add-on method works and how to calculate the total interest, monthly payments, and the difference between the add-on method and simple interest method. Let's break down each question and go through the steps to find the answers.
1. How much total interest will I have to pay on the loan if it is held for the full 5-year term?
To calculate the total interest using the add-on method, we need to multiply the loan principal by the interest rate and the loan term. The formula for total interest using the add-on method is:
Total Interest = Loan Principal * Interest Rate * Loan Term
In this case, the loan principal is $10,000, the interest rate is 9% (0.09 as a decimal), and the loan term is 5 years (60 months). Let's calculate the total interest:
Total Interest = $10,000 * 0.09 * 5 = $4,500
Therefore, the total interest you have to pay on the loan is $4,500.
2. What are my monthly payments?
In the add-on method, the monthly payments are determined by adding the principal and the total interest and then dividing by the number of months. The formula to calculate monthly payments using the add-on method is:
Monthly Payments = (Loan Principal + Total Interest) / Number of Months
For this loan, the loan principal is $10,000, the total interest is $4,500, and the loan term is 5 years (60 months). Let's calculate the monthly payments:
Monthly Payments = ($10,000 + $4,500) / 60 = $241.67
Therefore, your monthly payments will be approximately $241.67.
3. How much higher are the monthly payments under the add-on method compared to the simple interest method?
To compare the monthly payments under the add-on method to the simple interest method, we need to understand the formula for calculating monthly payments using the simple interest method.
The formula for monthly payments using the simple interest method is:
Monthly Payments = (Loan Principal + Total Interest) / Number of Months
However, in the simple interest method, the interest is calculated on the outstanding balance, not on the original loan amount. Since the add-on method assumes the interest is calculated on the original loan amount, the monthly payments will be higher.
To calculate the monthly payments using the simple interest method, we would need to know the interest rate applied to the outstanding balance, which is not provided in the question. Therefore, we cannot determine the exact difference in the monthly payments between the two methods.
In general, the add-on method tends to have higher monthly payments compared to the simple interest method due to the calculation of interest on the full loan principal throughout the term.