Question

Ryan has an eight-year loan for $6,000. He is being charged an interest rate of 5 percent, compounded annually. Calculate the total amount that he will pay.

Answer 1

Given:
Principal : $6,000
Interest Rate: 5%
Term : 8 years, compounded annually.

The term compounded annually is a hint that informs us to use the compounded interest formula instead of the simple interest formula.

Compounded interest formula is: 

A = P(1 + r/n)^nt

where:
A = future value of loan or investment including the interest
P = principal
r = rate
n = the number of times the interest is compounded per year
t = the number of years the money is borrowed or invested

A = P (1 + r/n)^nt
A = 6,000 (1 + 0.05/1)¹ * ⁸
A = 6,000 (1.05)⁸
A = 6,000 (1.48)
A = 8,880

The total amount Ryan will pay after 8 years is $8,880.00