Question

On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid in six years?

Loan: $100,000

Interest rate: 7 percent

Term: 180 months

Up-front costs: 7 percent of loan amount

Please solve using BA II plus

Answer 1

Please find answer as below:

Taking into consideration that interest calculation is on simple interest method and there is no pre-payment charges to be paid since no pre-paid charges has been mentioned in the question.

Simple Interest Calculation
Amount (Principal)	100000
Interest rate	7%
Term (years)	6
Interest for 6 yrs.	42000
Upfront cost	7%
Upfront cost in amount	7000
Total Borrowing cost if the loan is prepaid in 6 yrs	Amount
Interest for 6 yrs.	42000
Upfront cost in amount	7000
Total Borrowing Cost	49000