detailed answer

Question

How long will it take Kate to pay for her furniture set if she chooses to payonly the minimum monthly payment of 2% of the outstanding balance? Her furniture set cost $3,750 financed at 19 3/4% annual interest.

Answer 1

Truthfully, if Kate always pays only 2% of the balance, she will NEVER pay 100% of the balance or payoff her furniture.

 

You can use a spreadsheet to calculate the monthly payments and balances.

 

each month the previous month's balance is charged interest 1.1975^(1/12)=1.015133033

then 2% is paid and deducted from the balance.

the next month the remainder is charged interest and 2% is paid and so on.

 

The first few rows will look like this:

 

           Balance                 Balance
           before                   after
month payment  payment  payment
    0   $3,750.00
    1   $3,806.75  $76.13    $3,730.61
    2   $3,787.07  $75.74    $3,711.33
    3   $3,767.49  $75.35    $3,692.14
    4   $3,748.02  $74.96    $3,673.05
    5   $3,728.64  $74.57    $3,654.07
    6   $3,709.36  $74.19    $3,635.18
    7   $3,690.19  $73.80    $3,616.38
    8   $3,671.11  $73.42    $3,597.69
    9   $3,652.13  $73.04    $3,579.09
   10  $3,633.25  $72.67    $3,560.59

 

After 936 payments (78 years) the balance will be $29.32