Determine the cost of credit for a 2-year, $5,000 credit card loan with a monthly payment of $257.67, which corresponds to a fixed compound interest rate of 21.3% compounded monthly. Round the answer to two decimal places as needed.(1 point)
To determine the cost of credit for a loan, we need to find the total amount paid over the course of the loan (including both the principal amount borrowed and the interest), and then subtract the original principal amount.
The formula to find the total amount paid for a loan with monthly payments, compounded monthly, is:
Total Amount Paid = Monthly Payment x Number of Payments
In this case, the monthly payment is $257.67 and the loan term is 2 years, which equals 24 monthly payments. So:
Total Amount Paid = $257.67 x 24 = $6,184.08
Next, we subtract the original principal amount of $5,000:
Cost of Credit = Total Amount Paid - Original Principal
Cost of Credit = $6,184.08 - $5,000 = $1,184.08
Therefore, the cost of credit for this 2-year, $5,000 credit card loan is $1,184.08.