Question

Eleanor Wotek took out a simple interest installment loan of $1,525 at 8 percent for 6 months. Her monthly payment on the loan is $260.17. After 3 payments, the balance is $769.98. If she pays off the loan when the next payment is due? a. What is the final payment? (2 points) b. How much is saved by paying off the loan early? (3 points)

Answer 1

a. Final payment = $831.58

b. Amount saved = -$520.34

Explanation:

a. What is the final payment? (2 points)

Interest element of fourth month payment = Principal balance after third month payment * 8% = $769.98 * 8% = $61.60

Final payment = Principal balance after third month payment + Interest element of fourth month payment = $769.98 + $61.60 = $831.58

b. How much is saved by paying off the loan early? (3 points)

Amount saved = (Monthly payment * 2 months) - Final payment = ($260.17 * 2) - $831.58 = -$520.34

Note:

The amount saved in part b above is negative i.e. -$520.34 which implies that Eleanor Wotek actually paid more instead of saving some amount.