Question

Daniel takes out a $10,000.00 loan. At the end of each month, the bank calculates 1% of the remaining loan balance (the “accrued interest”) and adds that amount to the remaining loan balance. If Daniel’s monthly payment was $100.00, would Daniel be able to eventually pay-off the loan? Explain your reasons or show your work.

Answer 1

Daniel will not be able to eventually pay of the loan.

Step-by-step explanation:

At the end of the first month, the bank will charge interest of $100 i.e
`interest = $10,000 * 1% = $100`

Daniel pays $100 at the end of this first month, and this payment goes towards covering the interest charged on the loan, such that he begins month 2 with a balance of $10,000 in his loan account. At the end of the month, the bank charges interest of $100 again, i.e 1% of $10,000 and Daniel again makes a payment that is just enough to cover the interest only for that month and this payment is not reducing the principal owed.

This goes on and on, with Daniel only paying accrued interest at the end of each month. Therefore, Daniel will not eventually be able to pay off his loan.