Question

Suppose that you need $24,000 for your last year of college. You could go to a private lending institution and apply for a signature student loan; rates range from 7% to 14%. However, your Aunt Sally is willing to lend you the money from her retirement savings, with no repayment until after graduation. All she asks is that in the meantime, you pay her each month the amount of interest that she would otherwise get on her savings (since she needs that to live on), which is 5%. What is your monthly payment to Aunt Sally? (Aunt Sally will be glad to hear from you every month, anyway!)

Answer 1

The monthly payment to Aunt Sally for a $24,000 loan at 5% interest is calculated as $24,000 multiplied by 0.05, and then divided by 12, resulting in a payment of $100 per month.

Step-by-step explanation:

To calculate the monthly payment to Aunt Sally on a $24,000 loan at 5% interest, we need to use the formula for the monthly interest on an investment or loan, which is the principal amount times the annual interest rate, divided by 12 months. In this scenario:

• Principal (P) = $24,000
• Annual Interest Rate (r) = 5% or 0.05
• Number of Payments per Year (n) = 12

The monthly interest payment (I) can be calculated as:

I = P × r / n

Plugging in the values, we get:

I = $24,000 × 0.05 / 12

I = $100 per month

Thus, your monthly payment to Aunt Sally will be $100.