Cloey has just purchased new bedroom furniture from Haverty’s for a total of $10,000. She paid 20% down and, through a special promotional, she can pay off the $8000 in ten $800, no-interest payments over the next 10 months. The smaller print at the bottom of the contract states that if any of the payments is not paid in full (meaning $800) or late by one or more days, the remaining unpaid balance will revert to an interest-based loan at the APR rate of 36% per year, compounded monthly, to be paid out completely in a period of 5 months starting 1 month after any infraction of the agreement. Cloey made the first three payments on time and in the full amount; however, she could only pay $600 on time when the fourth payment was due. (a) Calculate the equal monthly payments that she must

Question

now pay, again in the full amount and on time to avoid further penalties stated in additional “fine print” of the agreement. (b) How does the total amount she paid for the furniture over the 10-month period including the APR-penalty interest compare with the original cost of $10,000? Assume Cloey makes all five interest-bearing payments in full and on time.

What will be an ideal response?

Answer 1

(a) Balance on loan after payment 4 = $5000
Payment, A = -5000(A/P,3%,5) = -5000(0.21835) = $-1091.75 per month
(b) Total paid = 20% down + no-interest payments + interest-bearing payments
= 2000 + 3000 + 5(1091.75)

= $10,458.86