Question

You take out a $10,000 loan with a 5 percent annual interest rate. You plan to pay $1,005 dollars each year over 10 years. After a decade, where will you be in relation to the loan? (Hint: assume simple interest.)

A) It will be completely paid off.

B) You will still owe $5,000 on the loan.

C) You will have overpaid by $50.

D) You will still owe $4,500 on the loan.

Answer 1

After 10 years of paying $1,005 annually on a $10,000 loan with a 5% interest rate, you will have paid a total of $15,050. This amount includes $5,000 in interest. Consequently, you will have overpaid by $50 compared to the initial loan amount.

Step-by-step explanation:

To determine where you will be about the loan after 10 years, we need to calculate the total amount you will have paid. You plan to pay $1,005 each year for 10 years, so the total amount you will have paid is $1,005 multiplied by 10, which is $10,050. Next, we need to calculate the total amount of interest you will have paid. The loan is for $10,000 with a 5% annual interest rate. The simple interest can be calculated using the formula: Interest = Principal × Rate × Time. In this case, Principal = $10,000, Rate = 5%, and Time = 10 years. Plugging in these values, we get Interest = 10,000 × 0.05 × 10 = $5,000. Adding the interest to the total amount paid, we get $10,050 + $5,000 = $15,050. Therefore, after a decade, you will be $15,050 for the loan. Since this is more than the initial loan amount, you will have overpaid by $50.