I am borrowing $ 10,000 for 5 years at 7% . Payments are made on a monthly basis and are determined using the add- on method. 1: How much total interest will I pay on the loan if I held it for the full 5 year term ? 2 : What would my monthly payments be and 3: How much higher would the monthly payments be under the add - on method than under the simple - interest method ?
same question as joyce
To calculate the answers to your questions, we need to understand the add-on method and the simple interest method first. Then we can proceed to calculate the total interest paid, monthly payments, and the difference between the add-on and simple interest methods.
1. Add-on method: In the add-on method, the interest is calculated on the original loan amount and added to the total payment. The total payment amount is then divided by the number of payments to determine the monthly payment.
2. Simple interest method: In the simple interest method, the interest is calculated only on the remaining balance of the loan. The monthly payment is determined by dividing the total loan amount by the number of months in the loan term.
Let's calculate the answers to your questions step by step:
1. Total interest paid with the add-on method:
First, we need to calculate the total payment amount using the add-on method. The total payment amount is calculated by adding the interest to the principal loan amount.
Principal loan amount = $10,000
Interest rate = 7%
Term = 5 years
Number of payments = 5 years * 12 months/year = 60 payments
Total payment amount = Principal loan amount + (Principal loan amount * Interest rate)
Total payment amount = $10,000 + ($10,000 * 7%)
Total payment amount = $10,000 + $700
Total payment amount = $10,700
To calculate the total interest paid, we need to subtract the principal loan amount from the total payment amount:
Total interest paid = Total payment amount - Principal loan amount
Total interest paid = $10,700 - $10,000
Total interest paid = $700
Therefore, the total interest paid on the loan with the add-on method over the 5-year term would be $700.
2. Monthly payments with the add-on method:
To calculate the monthly payment using the add-on method, we divide the total payment amount by the number of payments.
Monthly payment = Total payment amount / Number of payments
Monthly payment = $10,700 / 60
Monthly payment ≈ $178.33
Therefore, the monthly payment with the add-on method would be approximately $178.33.
3. Difference in monthly payments between add-on and simple interest methods:
To calculate this difference, we need to calculate the monthly payment using the simple interest method and subtract it from the monthly payment obtained using the add-on method.
To calculate the monthly payment using the simple interest method, we divide the total loan amount by the number of months in the loan term:
Monthly payment with simple interest method = Principal loan amount / Number of payments
Monthly payment with simple interest method = $10,000 / 60
Monthly payment with simple interest method ≈ $166.67
The difference in monthly payments between the add-on and simple interest methods is:
Difference = Monthly payment with add-on method - Monthly payment with simple interest method
Difference = $178.33 - $166.67
Difference ≈ $11.66
Therefore, the monthly payments under the add-on method would be approximately $11.66 higher than the monthly payments under the simple interest method.
I hope this helps you understand how to calculate the total interest paid, monthly payments, and the difference between the add-on and simple interest methods for your loan.