Gary is taking out a $5,000 loan for 1 year at an APR of 12%.His bank has offered him a loan using the add-on method.Using first the financial calculator method and the add-on method calculate Gary's monthly loan payment.

Question

Quizplus · Accepted Answer

Using the financial calculator method (or the formula for an amortizing loan), the monthly payment can be calculated using the formula for the monthly payment of a loan: $PMT = P \times \frac{r(1+r)^n}{(1+r)^n-1}$, where $P$ is the principal amount ($5,000), $r$ is the monthly interest rate (APR/12, so 0.12/12 = 0.01), and $n$ is the total number of payments (12 for one year). Plugging in the values, we get a monthly payment of approximately $444.24.Using the add-on method, the total interest is calculated first and then added to the principal before dividing by the number of months to find the monthly payment. The total interest using the add-on method is $P \times r = $5,000 \times 0.12 = $600$. Adding this to the principal gives $5,600, which, when divided by 12, gives a monthly payment of approximately $466.67.

Gary Is Taking Out a $5,000 Loan for 1 Year