Question

Amanda just took out a loan for $950 at a 7.2% APR, compounded monthly, to

buy a new set of tires for her car, and she has agreed to make monthly
payments of $38.50 to pay off the loan. If she changes her monthly payment
to $93.00, how much faster would she be able to pay off the loan?

A. 27 months faster
B. 38 months faster
C. 16 months faster
D. 11 months faster

Answer 1

C. 16 months faster

Explanation:

You can solve this using a Financial calculator( TI BA II plus in this case)

First, find number of months if recurring monthly payment is $38.50;

Amount borrowed ; PV = -950

Monthly rate ; I/Y = 7.2%/12 = 0.6%

Monthly payment; PMT = 38.50

Future value ; FV = 0

Total duration; press CPT, N = 26.785 OR 27 months

Next, find number of months if recurring monthly payment is $93;

Amount borrowed ; PV = -950

Monthly rate ; I/Y = 7.2%/12 = 0.6%

Monthly payment; PMT = 93

Future value ; FV = 0

Total duration; press CPT, N = 10.573 OR 11 months

Difference = 27 -11 = 16

Therefore, she would be able to pay off the loan 16 months faster.