Question

PAYING OFF CREDIT CARDS Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an Apple iPhone 5 for $380. The minimum payment on the card is only $20 per month. If Simon makes the minimum monthly payment and makes no other charges, how many months will it be before he pays off the card? Do not round intermediate calculations. Round your answer to the nearest month. month(s) If Simon makes monthly payments of $60, how many months will it be before he pays off the debt? Do not round intermediate calculations. Round your answer to the nearest month. month(s) How much more in total payments will Simon make under the $20-a-month plan than under the $60-a-month plan. Do not round intermediate calculations. Round your answer to the nearest cent. $ Please explain how to do calculation on a financial calculator.

Answer 1

Answer a.

Amount borrowed = $380
Monthly payment = $20
Annual interest rate = 18%
Monthly interest rate = 1.50% (18% / 12)

Let n be the number of monthly payments

$380 = $20 * PVIFA(1.50%, n)

Using financial calculator:
I = 1.50%
PV = -380
PMT = 20
FV = 0

N = 23

Number of months = 23

Answer b.

Amount borrowed = $380
Monthly payment = $60
Monthly interest rate = 1.50%

Let n be the number of monthly payments

$380 = $60 * PVIFA(1.50%, n)

Using financial calculator:
I = 1.50%
PV = -380
PMT = 60
FV = 0

N = 7

Number of months = 7

Answer c.

Monthly payment of $20:

Total amount paid = $20 * 23
Total amount paid = $460

Monthly payment of $60:

Total amount paid = $60 * 7
Total amount paid = $420

So, Simon will pay $40 more under the $20-a month plan than under the $60-a month plan.