Question

You purchase a car using a $20,000 loan with a 5% simple interest rate.
(a) Suppose you pay the loan off after 4 years. How much interest do you pay on your loan? Show your
work and don’t forget the unit!
(b) Suppose you pay the loan off after 3 years. How much interest do you save by paying the loan off
sooner? Show your work and don’t forget the unit.
Answer: a) b)

Answer 1

a) Principal for the first year= $20,000
Rate=5% p.a.
Time=4 yrs
Interest=PRT/100
=>($20000x5x4)/100
=>%4000.
b) If you will pay the loan sooner that is in 3yrs,
P=$20000
R=5%
T=3yrs
Interest =(20000x5x3)/100
=>$3000
Interest saved by paying the loan sooner is ($4000-$3000)
=>$1000.