Thread: Simple Interest Calculation Help

Can i get some guidance with these please?

A couple borrows $10,000 for three years and is charged 10.5% Simple Interest per year.

a. Determine their monthly payment.

b. Assuming that each month's interest payment is the same, how much of the tenth payment goes to interest and how much goes to principal?



I am coming up with an answer of $920.83 for part a. Is that horribly wrong??

Originally Posted by Ife

A couple borrows $10,000 for three years and is charged 10.5% Simple Interest per year.
a. Determine their monthly payment.
I am coming up with an answer of $920.83 for part a. Is that horribly wrong??

Yes, horrible it is

920.83 times 36 = 33,149.88 ; see why?

What formula did you use?

yes, i know i was compounding instead! :s so i got a total for the 3 years of $13,150 and then when dividing that by 36 i get a monthly instalment of $365.28... is that better? And what about the 2nd part?

i am getting an answer of $316.95 for the 2nd part.. how is that for correctness?

ok so that's not correct either... egad!

Originally Posted by Ife

yes, i know i was compounding instead! :s so i got a total for the 3 years of $13,150 and then when dividing that by 36 i get a monthly instalment of $365.28... is that better? And what about the 2nd part?

Better, yes, but quite incorrect.
Can you tell me WHY you're not using the proper formula:
was it not given to you by your teacher?

The formula is:
P = Ai / [1 - 1/(1 + i)^n]
where:
P = payment
A = amount borrowed
i = interest rate per month
n = number of months

Does that scare you

no, what happened was that i was using the compounding formula. this is because i was getting a little confused with the SI formula when the interest was being credited at any time less than 1 yr... but i think i understand now..

so i getting a monthly payment of $365.28 now,

and the interest on the 10th month is $87.50, and the prinicipal on the 10th month is $277.78

yeh???

No, your payment is too high.

P = Ai / [1 - 1/(1 + i)^n]

i = .105 / 12
P = 10000i / [1 - 1/(1 + i)^36] = 325.02

But isnt it Simple Interest calculation we supposed to be doing? That looks like compounding you did there. The exercises were all under SI. so i think its SI i should have done...

Simple interest would presumably result in a lower payment than the
325.02 I gave you, as the interest is assumed to compound monthly.

BUT you got 365.28 using simple(?): makes no sense whatsoever.

Let's quit guessing; ASK your teacher to define "simple".
Like, simple can mean "simply divide the annual rate by 12"!