Axl Rose wants to start a new band. To do this, he needs to borrow $6500 from the bank. The bank wants Axl to pay of the loan in 3 years at an interest rate of 7.75%.

a) How much does Axl need to pay monthly to pay off the loan?

b) How much will Axl pay the bank in total after he makes all of his payments?

c) How much interest does the bank earn from this loan?

Solutions

a) First, divide $6500 by $1000 to get the number of units Axl needs to purchase.

$6500 / $1000 = 6.5 units.

Now, multiply this number by the number you find off the table. Look on the table down the row with 7.75% interest until you get under the 3 year column. You should find the number $31.23. Click here to see a picture of how to look this number up on the table.

Multiply the number of units by the cost per unit to get the monthly payment.

6.5 x $31.23 = $203.00

b) Axl will make 3 years of monthly payments. Since there are 12 months in a year, Axl will 3 x 12 = 36 payments. Each payment is $203 (from question a)). Therefore, Axl will pay the bank:

36 x $203.00 = $7308.00

c) Axl borrowed $6500 from the bank and paid back $7308. The extra money is interest for the bank. So the interest earned by the bank is:

$7308 - $6500 = $808.00