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?

(b) Suppose you pay the loan off after 3 years. How much interest do you save by paying the loan off
sooner?

Show your work and don’t forget the unit!

Answer 1

Simple interest = Cost Price + (Interest Percentage of Cost Price × number of years or months we are paying off)

a) SI = £20 000 + (5% of £20 000 × 4)
SI = £20 000 + (£1000 × 4)
SI = £20 000 + £4000 = £24 000

b) SI = £20 000 + (5% of £20 000 × 3)
SI = £20 000 + (£1000 × 3)
SI = £20 000 + £3000 = £23 000

£24 000 - £23 000 = £1000 that you saved!