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Can you make sure i got this right?

Can you make sure i got this right? I have a credit card balance of $5,000 on a credit card that has an annual interest rate of 15%, with interest compounded monthly. If I were to stop using his card and made a payment of $105.73 at the end of each month, I would pay off the account balance in 6 years.

How much interest would I pay?

After making 2 years of payments, if I want to pay off my balance completely. What is is unpaid balance at this time?

For the first question I have 5000(0.0125)/1-(1+0.0125)^-72=$105.73 a month

Total amount of payment for the 6 years is 72 monthly payments so then I would pay $7612.56 which means that I will pay $2612.56 of interest

For the second question if I paid 24 months or $2537.52 then the unpaid balance is $5075.04

Top Answer

(i) Total interest paid... View the full answer

  • Hi there, thanks for explaining but now I'm more confused. Why are you using $105.73 as your annuity payment when that is the monthly payment? Can you explain that.
    • hilde84
    • Aug 08, 2018 at 10:34am
  • You are most welcome. An annuity is a cash flow stream that occur at equal intervals and in equal amount. In this case, the loan require a periodic payment of $105.73 per month, and as indicated this amount is an example of an annuity. If the borrow decide to pay off the loan balance, they would save on the interest thus the use of the annuity formula instead of directly multiplying the monthly amount by remaining payments after 2 years. Note the annuity payment ( occur month payment in this case ) consist of interest and principal amount to be paid.
    • bfacenjoro
    • Aug 08, 2018 at 10:48am
  • Thanks so much for detailed explanation. I was very confused by it but now this makes sense. Thanks for explaining this to me.
    • hilde84
    • Aug 08, 2018 at 3:52pm

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