Question

​Shirley, a recent college​ graduate, excitedly described to her older sister the ​$1,150 ​sofa, table, and chairs she found today.​ However, when asked she could not tell her sister which interest calculation method was to be used on her​ credit-based purchase. Calculate the monthly payments and total cost for a bank loan assuming a​ one-year repayment period and

13 % interest.​ Now, assume the store uses the​ add-on method of interest calculation. Calculate the monthly payment and total cost with a​ one-year repayment period and 11% percent interest. Explain why the bank payment and total cost are lower even though the stated interest rate is higher

Answer 1

THE REPAYMENT UNDER ADD ON METHOD ARE BELOW :-

asset value=$1150

12 months

11% interest

pricipal repayment= 1150/12=95.83

interest payment = 1150*11%=126.50

here the interest amount is higher(126.5), because here interest is calculated on the entire loan amount. but earlier the calculation was on the outstanding balance at the end of the each month, so interest was low(68.52).