Question

You borrow $5,000 from your parents to purchase a used car. The arrangements of the loan are such that you make payments of $250 per month toward the balance plus 1% interest on the unpaid balance from the previous month. (a) Find the first year’s monthly payments and the unpaid balance after each month. (b) Find the total amount of interest paid over the term of the loan.

Answer 1

Part A:
1st month: Interest payable = 1% of $5,000 = $50.00
Amount paid in first month = $250 + $50.00 = $300
Unpaid balance = $5,000 - $250 = $4,750

2nd month: Interest payable = 1% of $4,750 = $47.50
Amount paid in second month = $250 + $47.50 = $297.50
Unpaid balance = $4,750 - $250 = $4,500

3rd month: Interest payable = 1% of $4,500 = $45.00
Amount paid in third month = $250 + $45.00 = $295.00
Unpaid balance = $4,500 - $250 = $4,250

4th month: Interest payable = 1% of $4,250 = $42.50
Amount paid in fouth month = $250 + $42.50 = $292.50
Unpaid balance = $4,250 - $250 = $4,000

5th month: Interest payable = 1% of $4,000 = $40.00
Amount paid in fifth month = $250 + $40.00 = $290.00
Unpaid balance = $4,000 - $250 = $3,750

6th month: Interest payable = 1% of $3,750 = $37.50
Amount paid in sixth month = $250 + $37.50 = $287.50
Unpaid balance = $3,750 - $250 = $3,500

7th month: Interest payable = 1% of $3,500 = $35.00
Amount paid in seventh month = $250 + $35.00 = $285.00
Unpaid balance = $3,500 - $250 = $3,250

8th month: Interest payable = 1% of $3,250 = $32.50
Amount paid in eighth month = $250 + $32.50 = $282.50
Unpaid balance = $3,250 - $250 = $3,000

9th month: Interest payable = 1% of $3,000 = $30.00
Amount paid in ninth month = $250 + $30.00 = $280.00
Unpaid balance = $3,000 - $250 = $2,750

10th month: Interest payable = 1% of $2,750 = $27.50
Amount paid in fouth month = $250 + $27.50 = $277.50
Unpaid balance = $2,750 - $250 = $2,500

11th month: Interest payable = 1% of $2,500 = $25.00
Amount paid in seventh month = $250 + $25.00 = $275.00
Unpaid balance = $2,500 - $250 = $2,250

12th month: Interest payable = 1% of $2,250 = $22.50
Amount paid in eighth month = $250 + $22.50 = $272.50
Unpaid balance = $2,250 - $250 = $2,000



Part B:
Number of payments = 5000 / 250 = 20
Total amount of interest = 50 + 47.5 + 45 + . . . + upto the 20th payment.
This is an arithmetic sequence with the first term as 50, common difference as -2.5 and number of terms = 20.

Sum of the first 20th term of the GP is given by
$S_n= \frac{20}{2}[2(50)+(20-1)(-2.5)] \\ \\ =10(100-2.5(19))=10(100-47.5) \\ \\ =10(52.5)=\ 525.00$

Therefore, the total amount of interest paid over the term of the loan is $525.00