Shirley borrowed $1,500 to buy some new furniture, but she doesn’t know which interest calculation method...

Shirley borrowed $1,500 to buy some new furniture, but she doesn’t know which interest calculation method was used on her purchase. Calculate monthly payments assuming a 1 year repayment period and 14% interest. Now assume the store uses add-on method of interest calculation, calculate the monthly payment and total cost assuming a 1 year repayment period but only a 12% interest charge. Why at a lower interest rate, does the add-on method of interest calculation result in higher monthly payments? (1)

Expert Solution

1.
=Loan*(rate/12)/(1-1/(1+rate/12)^(12*n))
=1500*(14%/12)/(1-1/(1+14%/12)^(12*1))
=134.68

2.
=(Loan+Loan*rate)/12
=(1500+1500*12%)/12
=140.00

3.
Add on applies interest to the entire beginning balance but normal amortized loan applies interest to declining balance

jeff jeffy answered 2 years ago

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