Interest Compounded Problem

Question

I am unsure how to solve this problem:

You borrow $2500 at 12.25% interest compounded monthly. If you are unable to make any payments the first year, how much do you owe, excluding penalties?

Answer 1

If you don't make any payments the first year, then the $2500 balance will accumulate at the effective interest rate, and that is what you'll owe.

It would then be 2500(1 + ^0.1225/₁₂)¹² ≈ $2824.04.

If you were on a monthly payment plan, it would add more than a year to the pay-off date if the payment amount didn't change. If you wanted it to paid off at the same time as it was to be originally, you would need to recalculate for a higher monthly payment.