Miguel Perez of Pamona, California, obtained a two-year installment loan for $1,600 to buy a television set eight months ago.

Miguel Perez of Pamona, California, obtained a two-year installment loan for $1,600 to buy a television set eight months ago. The loan had a 10.3 percent APR and a finance charge of $177.92. His monthly payment is $74.08. Miguel has made eight monthly payments and now wants to pay off the remainder of the loan. The lender will use the rule of 78s method to calculate a prepayment penalty.

a.How much will Miguel need to give the lender to pay off the loan? Do not round intermediate calculations. Round your answer to the nearest cent. Use rounded answer for later calculations. $__________

b.What is the dollar amount of the prepayment penalty on this loan? Round your answer to the nearest cent. $___________

Expert Solution

a.

164 ÷ 300 × $177.92 = $97

Miguel has already paid $592.64 ($74.08 × 8). Therefore, only $496 ($593 – $97) was paid on the amount borrowed, leaving $1104 ($1600 – $496) still owed

b.

$59 ($177.92 × 0.33) would be due in finance charges from the $592.64 already paid. If that were correct, $534 ($593 – $59) of the $1600 loan would be paid and only $1066 would still be due. This makes a prepayment penalty of $38 ($1104 – $1066)

jeff jeffy answered 2 years ago

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