Question

Credit cards vary greatly in the interest rate charged. Typical APR rates are close to 17%, and monthly minimum payments are usually computed using a 10-year repayment period. Jimbob wants to pay it over 5 years. So, the interest rate on Jimbob’s credit card is 12% compounded monthly. The total credit card payment was originally $20,000. How much will Jimbob end up paying?

Answer 1

In case of Jimbob, we are given that:

Tenure of loan = 5 years = 60 equated monthly installments (EMI) = 60 = N
Rete of interest = 12% p.a., when calculated monthly = 12%/12 = 1% = 1/100 = 0.01 = R
Original amount due = $20000 = P
Total amount that Jimbob will end of paying = Amount of each EMI x 60 monthly payments

Let us first find out the amount of each EMI:

We know the following formula of calculating EMI is:
EMI = [P x R x (1+R)^N]/[((1+R)^N)-1]
(where P stands for the loan amount or principal, R is the interest rate per month)

Let us now put the values in to the formula:

EMI = [$ 20000 x 0.01 x (1.01)^60] / [(1.01^60) - 1]

When we solve it, we get EMI = $444.88

When if we combine all 60 EMIs, we get to know that Jimbob ends up paying, across 60 months, a total amount of $444.88 x 60 = $26692.80