Question

You purchase a car using a $20,000 loan with a 5% simple interest rate.

(a) Suppose you pay the loan off after 4 years. How much interest do you pay on your loan? Show your work.
(b) Suppose you pay the loan off after 2 years. How much interest do you save by paying the loan off sooner? Show your work.

Answer 1

Answer:

A: 24,000

I=Prt

20,000 x 0.05 = 1,000 x 4 = 4,000 + 20,000 = 24,000

B: 2,000

I=Prt

20,000 x 0.05 = 1,000 x 2 = 2,000 + 20,000 = 22,000

24,000 – 22,000

Explanation:

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Answer 2

a) I=prt; I=20,000(.05)(4) = $4000 b) I = prt; I = 20,000(.05)(2) = $2000 $4000-$2000 = $2000. You save $2000 by paying it off in 2 years vs. 4 years