Question

Suppose you have a credit card balance of $15,000 which you want to repay in equal end-of-month payments for 5 years with a nominal annual interest rate of 18%, compounded monthly. What is the amount of the payments?

Answer 1

The amount of the payment is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 0.18 / 12 (Since the payments are monthly, hence divided by 12)

= 1.5% or 0.015

n is computed as follows:

= 5 x 12 (Since the payments are monthly, hence multiplied by 12)

= 60

So, the payment will be computed as follows:

$ 15,000 = Monthly payment x [ (1 - 1 / (1 + 0.015)⁶⁰ ) / 0.015 ]

$ 15,000 = Monthly payment x 39.38026889

Monthly payment = $ 15,000 / 39.38026889

Monthly payment = $ 380.90 Approximately

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