Why is the annual interest rate more important to a borrower who carries a balance than to a borrower who pays off the
2 answers:
Answer:
Interest to be paid will keep on reducing each month due to reduction of the principal amount.As a result the net interest outgo will be higher for a borrower who carries balance for the whole year compared to one who pays offs monthly.
Step-by-step explanation:
The interest outgo for any balance depends on 3 things:
- Principal amount
- Duration of the borrowing
- Annual Interest Rate
In case of borrower who carries the balance, the annual interest is:
On the other hand, a borrower who pays the balance monthly,will have a reducing balance on which interest in computed each month. For example,
Month 1 : Interest is computed on entire amount P
Month 2: Interest is computed on
Month 3: Interest is computed on
and so on.
So the interest to be paid will keep on reducing each month due to reduction of the principal amount.
As a result the overall interest outgo at the end of the year will be less compared to the borrower who carries the balance.
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Step-by-step explanation:
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