Do the Math #5: Rule of 78s. Aaron Carson of Hays, Kansas, obtained a two-year i

Question

Do the Math #5: Rule of 78s. Aaron Carson of Hays, Kansas, obtained a two-year installment loan for $1,500 to buy some furniture eight months ago. The loan had a 12.6 percent APR and a finance charge of $204.72. His monthly payment is $71.03. Aaron has made eight monthly payments and now wants to pay off the remainder of the loan. The lender will use the Rule of 78s method to calculate a prepayment penalty.

a) How much will Aaron need to give the lender to pay off the loan?
b) What is the dollar amount of the prepayment penalty on this loan?

Explanation / Answer

Anwer a:

(24+23+22+21+20+19+18+17) (for 8 months) /300 (sum of digits from 1 to 24)

=164/300 = 0.54667

So finance charges are 0.54667 X $204.72 = $111.91 paid in 8 months out of $204.72.

Aaron already paid $568.24 ($71.03 X 8) as monthly payments Thus only $456.32 ($568.24 - $111.91) was paid on amount borrowed leaves $1043.68 ($1500-$456.32) still owed.

Answer B:

Since the loan is being paid off after only 1/3 of the loan period, only 1/3 of the finance charges would accrue. This means that $ 68.24 ($204.72 X 1/3) would be due in charges from the $568.24 already paid. If correct $ 500 ($568.24 - $ 68.24) of the $1500 loan would be paid and only $1000 would still due. This makes a prepayment penalty of $ 43.68 ( $1043.68 - $1000).

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.