Question

1. You get a Home Depot credit card that allows six month deferred interest financing. This means that they keep track of your interest, but don’t add it to your account as long as you pay off your balance before the six months is up. You decide to renovate your bathroom and spend $2,349.74 on your card. The card has an APR of 32.99%, compounded monthly.

   1. If you want to pay it off in six equal monthly payments, how much would you need to pay each month to pay it off in six months and not pay any interest? How much interest did you save by doing this?

   2. If you make payments of $300 per month, how much interest will be added to the account at the end of the six-month promotional period? If you continue making $300 payments, how long will it take you to pay off the loan and how much will you have paid in total?

   3. Repeat part b, paying $100 per month instead.

Answer 1

To payoff in six equal monthly installments, the amount to be paid each month = $2,349.74 6

Equal monthly installments = $ 391.62

Interest per month = 0.3299 12 = 2.75% per month

Interest saved for 6 months = $ 415.36

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If $ 300 payment is made per month for six months.

The interest paid for six months can be found by building the amortization schedule.

The interest added to the account at end of six month period = $ 286.97

If $ 300 is continued to be paid at the end of each month, the time taken to payoff the loan is found using the amortization schedule.

The loan will be paid off in 8.94 months.

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If $ 100 is paid per month. The amortization schedule is shown in the table.

Total interest paid = $ 1479.49

The loan will be paid off in 38.29 months