math APR RULE OF THUMB

Question

Rounding in the calculation of monthly interest rates is discouraged. Such rounding can lead to answers different from those presented here. For long-term loans, the differences may be pronounced.

You borrow $25,000 with a term of two years at an APR of 5%. Use the Monthly Payments for Short-Term Loans Rule of Thumb to estimate your monthly payment. (Round your answer to the nearest cent.)

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Answer 1

This is a pretty weird question because you are admonished not to estimate and then assigned to do just that.

Anyhow, if we consider this a short-term loan at a low interest rate, then the rule of thumb says to ignore (temporarily)the fact that you have to pay interest. The loan is for $25,000 over a period of two years. To get an estimated payment (that will always be lower than the actual payment) simply divide the $25,000 principal by the number of months in the term of the loan (that is, 24 months). That would give is $25,000/24 = $1,041.67 per month.

Best wishes!