Round to the nearest penny.
Your friend wants to borrow $1,137.45 from you to pay off a credit card that charges a 14.7% APR. You agree to the loan but require your friend to pay you interest of 3.6% APR on the loan and your friend agrees.
Your friend pays you $200.00 at the end of the first month. How much goes toward the principal
How much interest does your friend save compared to the credit card at the end of the first month?
To calculate the interest paid towards the loan, we first need to calculate the interest on the loan for the first month.
Interest on the loan = Loan amount * Monthly interest rate
Monthly interest rate = (3.6% / 12) / 100 = 0.003
Interest on the loan = $1,137.45 * 0.003 = $3.41
Out of the $200 payment, $3.41 goes towards interest and the rest goes towards the principal.
Therefore, the principal paid off in the first month = $200 - $3.41 = $196.59
To calculate the amount of interest saved compared to the credit card, we need to compare the interest paid on the credit card and the interest paid on the loan.
Interest on credit card = $1,137.45 * 14.7% / 12 / 100 = $17.65
The interest saved compared to the credit card = Interest on credit card - Interest on the loan
= $17.65 - $3.41
= $14.24
Therefore, your friend saved $14.24 in interest compared to the credit card at the end of the first month.