A to Z Mortgages made a home equity loan to your friend. For a 4-year loan of $10,000 at 10% per year, what annual payment must he make to pay off the entire loan in 4 years if interest is charged on (a) the original principal amount of $10,000, and (b) the unrecovered balance? (c) What is the difference in the annual payments between the two bases for interest? Which method requires more money to repay the loan?
What will be an ideal response?
(a) Annual payment = principal/# of periods + interest per year
= 10,000/4 + 10,000(0.10)
= $3500
(b) A = 10,000(A/P,10%,4)
= 10,000(0.31547)
= $3154.70
(c) Difference = 3500 – 3154.70
= $345.30
$345.30 more is required to repay the loan based on the original principal.
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What will be an ideal response?
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