Your credit card has a balance of $5600 and an annual interest rate of 14%. You decide to pay off the balance over two years. If there are no further purchases charged to the card, you must pay $268.81 each month, and you will pay a total interest of $851.44. Assume you decide to pay off the balance over one year rather than two. How much more must you pay each month and how much less will you pay in total interest?
If you decide to pay off the balance over one year, you will have to pay more each month in order to pay off the balance sooner.
To calculate the new monthly payment, you would divide the total balance of $5600 by 12 months, which equals $466.67 per month.
The total interest paid over the course of one year would be less because you are paying off the balance faster. To calculate the total interest paid over one year, you would subtract the original balance from the total amount paid over the year. In this case, it would be $5600 - $5600 = $0.
Therefore, by paying off the balance over one year rather than two, you would have to pay an additional $197.86 per month, but you would save $851.44 in total interest paid.