Final answer:
Credit card debt and loans require careful planning for repayment. Paying more than the minimum amount can lead to significant savings on interest and a quicker repayment of the principal. Financial formulas help to calculate the exact monthly payments for various loan amounts and interest rates.
Step-by-step explanation:
Given the scenario of a credit card debt of $2,000 that requires minimum payments of $60 a month, which is roughly 3% of the balance, we can analyze the impact of making minimum payments versus making slightly higher payments. If your friend adds an additional $10 each month to the minimum payment, they are slightly accelerating the repayment of the principal amount. Because minimum payments usually cover mostly interest rather than the principal, paying more than the minimum can significantly reduce the total interest paid over time and expedite the clearing of debt.
To find specific payment amounts given different loan scenarios and interest rates, such as the monthly payment for a $5,000 credit card debt with 24.99% APR over 3 years or a $300,000 house loan over 30 years, financial formulas can be applied. These take into account the principal, interest rate, and duration, yielding the exact monthly payment needed to clear the debt in the desired time frame.
Moreover, making an extra payment each year (a fraction of 12 extra) on a mortgage or loan can substantially cut down both the repayment time and the overall interest paid. These concepts are crucial for financial planning and managing debt more effectively.