Question

You need to take a loan of $1,500. You have two repayment options:

- Option 1: Short-term 6% interest loan with a term of 1 year

- Option 2: 1-year simple interest amortized loan at 6% interest, monthly payments

Calculate the lump sum payment for plan A. Then calculate the monthly payment for plan B. Explain how you arrived at your answer.

Answer 1

Answer :

Calculation of Lumpsum Amount for Plan A

Lump sum Amount = Principal + (Principal * Interest)

= 1500 + (1500 * 6%)

= 1500 + 90

= 1590

Calculation of Monthly payment under plan B

Monthly Payment = [P * r * (1 + r)n ] / [(1 + r)n - 1 ]

where P is principal i.e 1500

r = rate of interest i.e 6% / 12 = 0.5% or 0.005

n = number of payments 1 * 12 = 12

Monthly Payment = [1500 * 0.005 * (1 + 0.005)12 ] / [(1 + 0.005)12 -1 ]

= [ 1500 * 0.005 * 1.0616778 ] / [ 1.0563958 - 1]

= 7.9625836 / 0.0563958

= 129.09964 or $129.10