Compute The Monthly Payments For An Add-on Interest Loan Of $2,660, With An Annual Interest Rate Of 7% And A Term Of 5 Years. The Monthly Payment Is $____. (Round To The Nearest Cent As Needed.)
Understanding Add-on Interest Loans
Add-on interest loans are a type of loan where the interest is added to the principal amount at the end of each interest period. This type of loan is also known as a simple interest loan. In this article, we will compute the monthly payments for an add-on interest loan of $2,660, with an annual interest rate of 7% and a term of 5 years.
The Formula for Add-on Interest Loans
The formula for computing the monthly payment for an add-on interest loan is:
M = P [ i (1 + i)^n ] / [ (1 + i)^n – 1]
Where:
- M = monthly payment
- P = principal amount
- i = monthly interest rate
- n = number of payments
Converting the Annual Interest Rate to a Monthly Interest Rate
To use the formula, we need to convert the annual interest rate to a monthly interest rate. The annual interest rate is 7%, so the monthly interest rate is:
i = 7%/year / 12 months/year = 0.005833 (or 5.833%/year)
Computing the Monthly Payment
Now that we have the monthly interest rate, we can plug in the values into the formula:
P = $2,660 i = 0.005833 n = 5 years * 12 months/year = 60 months
M = $2,660 [ 0.005833 (1 + 0.005833)^60 ] / [ (1 + 0.005833)^60 – 1]
Using a calculator to compute the value, we get:
M ≈ $49.19
Rounding the Monthly Payment
Since we are asked to round the monthly payment to the nearest cent, we round $49.19 to $49.19.
Conclusion
In this article, we computed the monthly payment for an add-on interest loan of $2,660, with an annual interest rate of 7% and a term of 5 years. Using the formula for add-on interest loans, we converted the annual interest rate to a monthly interest rate and plugged in the values to compute the monthly payment. The result is a monthly payment of $49.19.
Example Use Case
This formula can be used to compute the monthly payment for any add-on interest loan. For example, if you have a loan of $10,000 with an annual interest rate of 10% and a term of 3 years, you can use this formula to compute the monthly payment.
Step-by-Step Solution
Here is a step-by-step solution to compute the monthly payment for an add-on interest loan:
- Convert the annual interest rate to a monthly interest rate.
- Plug in the values into the formula for add-on interest loans.
- Compute the value using a calculator.
- Round the monthly payment to the nearest cent.
Additional Resources
For more information on add-on interest loans and how to compute the monthly payment, you can consult the following resources:
Frequently Asked Questions
Q: What is an add-on interest loan? A: An add-on interest loan is a type of loan where the interest is added to the principal amount at the end of each interest period.
Q: How do I compute the monthly payment for an add-on interest loan? A: You can use the formula for add-on interest loans, which is M = P [ i (1 + i)^n ] / [ (1 + i)^n – 1].
Q: What is the monthly interest rate? A: The monthly interest rate is the annual interest rate divided by 12 months/year.
Q: What is an add-on interest loan?
A: An add-on interest loan is a type of loan where the interest is added to the principal amount at the end of each interest period. This type of loan is also known as a simple interest loan.
Q: How do I compute the monthly payment for an add-on interest loan?
A: You can use the formula for add-on interest loans, which is:
M = P [ i (1 + i)^n ] / [ (1 + i)^n – 1]
Where:
- M = monthly payment
- P = principal amount
- i = monthly interest rate
- n = number of payments
Q: What is the monthly interest rate?
A: The monthly interest rate is the annual interest rate divided by 12 months/year. For example, if the annual interest rate is 7%, the monthly interest rate is 7%/year / 12 months/year = 0.005833 (or 5.833%/year).
Q: How do I round the monthly payment?
A: You can round the monthly payment to the nearest cent. For example, if the monthly payment is $49.19, you can round it to $49.19.
Q: What is the difference between an add-on interest loan and a compound interest loan?
A: An add-on interest loan is a type of loan where the interest is added to the principal amount at the end of each interest period. A compound interest loan, on the other hand, is a type of loan where the interest is added to the principal amount and then the interest is compounded on the new principal amount.
Q: Can I use a calculator to compute the monthly payment for an add-on interest loan?
A: Yes, you can use a calculator to compute the monthly payment for an add-on interest loan. You can also use a spreadsheet or a financial calculator to compute the monthly payment.
Q: How do I determine the number of payments for an add-on interest loan?
A: The number of payments for an add-on interest loan is the number of months you have to repay the loan. For example, if you have a 5-year loan, the number of payments is 5 years * 12 months/year = 60 months.
Q: Can I use the formula for add-on interest loans to compute the monthly payment for a loan with a variable interest rate?
A: No, you cannot use the formula for add-on interest loans to compute the monthly payment for a loan with a variable interest rate. The formula assumes a fixed interest rate, so you would need to use a different formula or method to compute the monthly payment for a loan with a variable interest rate.
Q: How do I compute the total interest paid for an add-on interest loan?
A: To compute the total interest paid for an add-on interest loan, you can use the formula:
Total Interest = P * i * n
Where:
- P = principal amount
- i = monthly interest rate
- n = number of payments
Q: Can I use the formula for add-on interest loans to compute the monthly payment for a loan with a balloon payment?
A: No, you cannot use the formula for add-on interest loans to compute the monthly payment for a loan with a balloon payment. The formula assumes a fixed payment amount for the entire term of the loan, so you would need to use a different formula or method to compute the monthly payment for a loan with a balloon payment.
Q: How do I determine the principal amount for an add-on interest loan?
A: The principal amount for an add-on interest loan is the amount borrowed from the lender. For example, if you borrow $10,000 from a lender, the principal amount is $10,000.
Q: Can I use the formula for add-on interest loans to compute the monthly payment for a loan with a prepayment penalty?
A: No, you cannot use the formula for add-on interest loans to compute the monthly payment for a loan with a prepayment penalty. The formula assumes a fixed interest rate and a fixed payment amount for the entire term of the loan, so you would need to use a different formula or method to compute the monthly payment for a loan with a prepayment penalty.
Q: How do I determine the monthly interest rate for an add-on interest loan?
A: The monthly interest rate for an add-on interest loan is the annual interest rate divided by 12 months/year. For example, if the annual interest rate is 7%, the monthly interest rate is 7%/year / 12 months/year = 0.005833 (or 5.833%/year).
Q: Can I use the formula for add-on interest loans to compute the monthly payment for a loan with a variable interest rate and a balloon payment?
A: No, you cannot use the formula for add-on interest loans to compute the monthly payment for a loan with a variable interest rate and a balloon payment. The formula assumes a fixed interest rate and a fixed payment amount for the entire term of the loan, so you would need to use a different formula or method to compute the monthly payment for a loan with a variable interest rate and a balloon payment.