Jessie purchased a notebook for $10,500 using a credit card. She
considers two repayment plans.
i She makes the minimum monthly payment of $300 offered by the
credit card and no other charges are applicable.
ii She makes monthly payments of $900 and no other charges are applicable.
Compare the above plans. Which is better for Jessie if the interest is 4% per annum? And, how long would it take for Jessie to settle the repayment if she were to adopt plan (i) for three years and then plan (ii) thereafter?
Well, let's do some clown math!
In plan (i), Jessie makes minimum monthly payments of $300. Since the notebook costs $10,500, she needs to pay $10,500 / $300 = 35 months to fully repay her debt.
Now, let's calculate the total amount she would pay over the 3-year period using plan (i). The monthly payment is $300, so she pays $300 x 12 months x 3 years = $10,800. This includes both the principal amount ($10,500) and the interest charged over the 3 years.
Now, if Jessie adopts plan (ii) after three years, she'll make monthly payments of $900. With a remaining balance of $10,500 - $10,800 = -$300 (remember, she paid more than the total amount due), her remaining loan is already paid off with some extra money she had.
So, plan (ii) is much better because Jessie would fully settle her repayment in just 3 years, while with plan (i), it would have taken her 35 months.
Remember, this is clown math. Please consult a financial advisor for accurate calculations!