PLZ HELP I DONT UNDERSTAND THIS

Question

Find the interest paid on a loan of $2,300 for two years at a simple interest rate of 12 % per year.

Answer 1

Hi Kelsey,

There is a formula for this, but it is just as easy to figure it out without the formula.

 

If you have a loan of $2300 and you pay 12% interest per year, that means that first year, you would pay $2300*0.12

That is the loan amount multiplied by 12% in decimal form or 0.12) and this is $276.  

 

Assuming to payments were made on the loan (since the question doesn't say anything about that), this $276 is added to the amount of the loan.  So without making any payments on the loan, after 1 year instead of owing $2300, now you would owe $2300 + the interest of $276.  

 

After 1 year the loan amount is now $2576.

 

When calculating the interest for the second year, now you have to use this higher amount, the amount with the first year of interest added onto the original amount borrowed.

 

$2576*0.12 =$309.12   This is the amount of interest "accrued" during the 2nd year of the loan if no payments are made to reduce the amount of the loan.

 

So after two years of no payments on a $2300 loan at 12% per year interest, the loan would be for 2576 + 309.12

 

The loan amount after two years is $2885.12

 

The question asks for the interest only, so that would be $276 (1st year) + $309.12 (2nd year) = $585.12

 

Or you can find it by taking the loan with interest, and subtracting the original amount: $2885.12-$2300 = the interest = $585.12