Question

Lee took out a loan for $1900 at 6% interest, compounded annually. If he

makes yearly payments of $220, will he ever pay off the loan?

A. Yes, because $220 is greater than the amount of interest he is
charged per year.
B. No, because $220 is less than the amount of interest he is
charged per year.
C. No, because $220 is greater than the amount of interest he is
charged per year.
D. Yes, because $220 is less than the amount of interest he is
charged per year.

Answer 1

A. Yes, because $220 is greater than the amount of interest he is charged per year.

Explanation:

6% interest on $1900 per year means, the amount will increase to 6%of $1900 + 1900

6% of 1900 = 0.06*1900 = $114

The amount after 1 year would be 1900+114 = $2014

Now when Lee pays $220 after first year, the remaining amount will be

2014 - 220 = $1794

With this, we conclude that the loan amount to be paid will reduce every year and Lee would be able to pay off the loan at some point if he makes yearly payments of $220.