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:
![\[\frac{Principal\times 1 \times Rate}{100}\]](https://tex.z-dn.net/?f=%5C%5B%5Cfrac%7BPrincipal%5Ctimes%201%20%5Ctimes%20Rate%7D%7B100%7D%5C%5D)
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 ![\[Principal - \frac{Principal}{12}\]](https://tex.z-dn.net/?f=%5C%5BPrincipal%20-%20%5Cfrac%7BPrincipal%7D%7B12%7D%5C%5D)
Month 3: Interest is computed on ![\[Principal-\frac{2 \times Principal}{12}\]](https://tex.z-dn.net/?f=%5C%5BPrincipal-%5Cfrac%7B2%20%5Ctimes%20Principal%7D%7B12%7D%5C%5D)
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.