Question

Sarah bought a lawnmower for $320. She signed up for the buy now pay later plan at the store with the following conditions: $100 down and payments of $25 for the next 12 months. The extra cost paid by taking this plan is equivalent to what actual yearly rate of interest? A. 67% B. 65% C. 25% D. 85%

Answer 1

Cost of the lawnmower bought by Sarah = $320
Amount of down payment made by Sarah = $100
Amount paid by Sarah in 12 months = (12 * 25) dollars
                                                          = 300 dollars
Total amount paid by Sarah = (300 + 100) dollars
                                             = 400 dollars
Excess amount paid as interest by Sarah = (400 - 320) dollars
                                                                   = 80 dollars
Actual yearly rate of interest paid by Sarah = (80/320) * 100 percent
                                                                     = 25 percent
So 25% yearly interest was paid by Sarah. The correct option is option "C".