Suppose you borrow 1000 dollars at 9 percent interest and you must repay it at the end of three years in one lump sum (i.e., no monthly payments during the three years). The loan is set up so that you are charged interest against the outstanding balance quarterly. How much will you need to pay off the loan at the end of the three years?
Suppose you purchase a dirt bike that costs $2400. You don't have the money so you "finance it" at 8% interest per annum. Based on your job, and expenses, you think you can pay about $140 a month for the bike. The bike finance company agrees and structures the note to accommodate your repayment plan. However, to make sure they get their money, they want you to set up an automatic monthly deduction from your pay check that goes to the bike finance company. How long will it take you to pay off the $2400 loan?
Suppose you must send your daughter on a trip to Europe that costs $4000. You don't have the money saved so you ask to borrow it from a friend. The friend usually earns 13% on investments and is willing to make the loan if you will pay back the $4000 plus 13% interest. The friend wants you to make an equal payment each month such that the entire loan is paid back in 9 months. How much will you need to pay each month to pay back $4000 at 13% by the end of the 9 months?
Suppose you wish to take out a mortgage for $150,000 to purchase a house. You have 20 years until retirement so you want the mortgage term to be for 20 years. The current going mortgage interest rate is 9.75%. Let's suppose that right now you can afford a monthly payment of $1500 a month from your salary but the mortgage company, at 9.75% for 20 years, only requires that you to pay $1422.78 per month.
Q1: How much interest will you pay if you only pay the $1422.78 per month? How many months to repay the $150,000?
Q2: How much interest will you pay if you pay the $1500 per month? How many months to repay the $150,000?
Next let's suppose that you get a 5% raise each year that will allow you to increase your monthly payment by 5% each July.
Q3: How much interest will you pay if you increase your payment by 5% each July? How many months to repay the $150,000?
Last, let's also suppose that you have been getting an annual bonus of $1500 each year at Christmas time and that you plan to make a one-time extra payment of $1000 each January.
Q4: How much interest will you pay if you add the $1000 extra payment each January? How many months to repay the $150,000?
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