Question

Consider a student loan of $12, 500 at a fixed APR rate of 9% for 25 years.

Answer 1

The monthly payment is; $104.9; The total amount paid over the term of the loan is; $31470

How to calculate APR?

We are given;

Loan principal = $12,500

Interest rate = 12%

Number of payments per year = 12 payments per year.

Loan term = 25 years.

Formula for monthly payment is;

PMT = (p * APR/n)/[1 - (1 + APR/n)^(-nY)]

Where;

p is principal

APR is interest rate

n is number of payments per year

Y is loan term

Thus;

PMT = (12500 * 0.09/12)/[1 - (1 + 0.09/12)^(-12 * 25)]

PMT = 93.75/(1 - 0.106288)

PMT = $104.9

B) Total amount paid over the loan term is;

A = PMT * m * n

where;

m is number of months in a year,

n is number of years

A = 104.9 * 12 * 25

A = $31470

C) The principal as a percentage of the loan is;

P/A = 12500/31470

P/A = 39.72%

Percentage paid for interest is = 100% - 39.72% = 80.28%

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