Question One:
Best method to use is the level method.
Why?
1. 78 Rule method:
For a 18 months term loan, the 78 rule factor will be nx(n+1)/2 for denominator and n for numerator where n is number of month in the loan.
Thus the factor will be 18/171.
I the borrower pays off the loan after 12 months, interest will apply to the first 12 months. The interest paid will be 18/171 of total interest for the first month, 17/171 of total interest for the second month, 16/171 for the third, etc.... till 7/171 for the 12th month.
We know that total interest would have been 9.5% of $2,000: $190.
Applying the rule 78 factors to that total interest, after one year, interest paid would be $166.6
2. Level method:
Using the level method, interest per month would have been $190 divided by 18, $10.555 per month. After 12 month, total interest paid would have been $10.555 X 12 = 126.6
Using the level method would have saved Lynn $40.
Question 2
1. Calculating the billing cycle ADB:
. carried over balance of 425.89 for 4 days thus 425.89 x 4 = 1,703.56
. on the 5th, new balance of 559.04 for 3 days thus 559.04 x 3 = 1,677.12
. on the 8th, new balance of 635.99 for 2 days thus 1,271.98
. on the 10th, new balance of 485.99 for 1 day thus 485.99
. on the 11th, new balance of 511.24 for 10 days thus 5,112.4
. on the 21st, new balance of 544.39 for 5 days thus 2,721.95
. on the 26th, new balance of 624.39 for 2 days thus 1,248.78
. on the 28th, new balance of 642.24 for 3 days thus 1,926.72
Adding these number will give us a total of 16,148.5 for 30 days giving us a daily average of 16,148.5 divided by 30 = $538.28
2. Interest rate to apply
APR is 9.5%
30 days cycle rate will be 30/365*9.5% = 0.78%
3. Credit card cycle charge
ADB x 0.78% = 538.28 x 0.78% = $ 4.20