Question

You have $2,500 on a credit card that charges a 15% interest rate. If you want to pay off the credit card in 4 years, how much will you need to pay each month (assuming you don't charge anything new to the card)?

Answer 1

Answer: $69.58

Step-by-step explanation

Effectively you are given a loan of $2500 and must pay it off in 4 years. The interest rate is 15% annually, which is equivalent to 15/12 = 1.25% monthly.

The monthly payment formula is

P = (L*i)/( 1 - (1+i)^(-n) )

where,

• P = monthly payment = unknown for now
• L = 2500 = loan amount, i.e. credit card balance
• i = 0.0125 = decimal form of the 1.25% monthly rate
• n = 4*12 = 48 month timespan

Then,

P = (L*i)/( 1 - (1+i)^(-n) )

P = (2500*0.0125)/( 1 - (1+0.0125)^(-48) )

P = 69.5768706661908

P = 69.58

The monthly payment is $69.58