Question

If James borrows $4,200 to pay his college tuition. He signs a 5 year simple interest loan. If monthly payments are $78.40, what is the interest rate on the loan?

Answer 1

The rate of interest applied on the loan is 2.4%

Explanation:

Given as :

The principal amount borrows as loan = p = $4200

The time period of loan = t = 5 years = 5 × 12 = 60 months

The monthly payment for loan = $78.40

So, The payment for 60 months = $78.40 × 60 = $4704

i.e Amount after 60 months = $4704

Let The rate of interest = r at simple interest

Now, From Simple Interest method

Simple interest =
`(\textrm principal* \textrm rate* \textrm time)/(100)`

Or, s.i =
`(\textrm p* \textrm r* \textrm t)/(100)`

Or, (Amount - principal) =
`(\textrm p* \textrm r* \textrm t)/(100)`

Or, $4704 - $4200 =
`(\textrm 4200* \textrm r* \textrm 5)/(100)`

Or,504 × 100 = 21,000 × r

∴, r =
`(50400)/(21000)`

i.e r = 2.4

So, The rate of interest = r = 2.4%

Hence, The rate of interest applied on the loan is 2.4% Answer