Question

What is the total finance charge for a $4,250 loan at 13.25% interest compounded monthly for 24 months?

Answer 1

Since only the principal value, interest rate and interest period are given, we can deduce that "finance charge" only includes the interest to be paid at the end of the term. This can be obtained by subtracting the principal value from the future value which we will solve for.

The future value can be solved by using the following compound interest formula:

Let:
F = Future value
P = Principal value
r = annual interest rate 
n = number of times that interest is compounded per year
t = number of years

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

Substituting the given values:
F = 4250(1 + 0.1325/12)^(12*2)
F = 5531.54

Subtracting P from F:
Finance charge = 5531.54 - 4250 = 1281.54

Therefore the finance charge is $1,281.54