Question

Lillie Manson paid for tuition at a summer school with an installment loan of $3,600 at 9% interest for 12 months. Her monthly payment was $314.83. After 6 payments, the balance was $1,840.34. She paid off the loan with the next payment. What did she save by paying off the loan early?
(Hint: First calculate the payoff: Find the interest on the balance due and add it to the balance due. Add the amount of the first six payments to the payoff in month 7. Compare this total to the monthly payment multiplied by 12.)

Answer 1

Her monthly payment was $314.83. Had she continued to pay that amount for the next 6 months, as per the original terms of the loan, she would have paid a total of $314.83 * 6 = $1888.98 After 6 months the balance was $1,840.34 and she pays off the balance and the interest on the 7th month. The interest on $1,840.34 for one month at 9% interest rate is: Prt = 1840.34 * .09 * 1/12 = $13.80. The interest combined with the principal = $13.80 + $1840.34 = $1854.14 The savings is: $1888.98 - $1854.14 = $34.84