Suppose you have two student loans: •$15,000 with an APR of 8% for 15 years •$10
ID: 3121390 • Letter: S
Question
Suppose you have two student loans: •$15,000 with an APR of 8% for 15 years •$10,000 with an APR of 9.5% for 20 years 1.Calculate the monthly payment for each loan individually. 2.How much do you pay each month? How long do you have to pay that monthly amount? 3.Over the course of each loan, how much total do you pay? How much of that is interest? How much interest will you pay in total? You have the opportunity to consolidate these 2 loans into a single loan with an APR of 8% and a term of 12 years. 4.What will be your monthly payment if you consolidate? 6.What will your total payments be over the life of the loan? How much of that is interest?
Explanation / Answer
Total Amount of loans after consolidation = $15000 + $10000 = $25000
APR = 8% and term =12 years
PVAF (8%, 12 years, monthly ) = 92.38387
Hence, Monthly payment after consolidation= 25000 /92.38387 =$270.61
Monthly payment for loan 1 = 15000 / PVAF (8%, 15 years . monthly) = 15000 /62.78515
= $238.91
Monthly payment for loan 2 (Separately) = 10000 / PVAF (9.5%, 20 years . monthly) = 10000 /107.28463
= $93.21
Total amount to be paid in case of consolidation = 270.61 *144 months = $38967.84
Total amount to be paid without consolidation :
Loan 1 =238.91 * 180 months = $43003.8
Loan 2 = 93.21 * 240 months = $22370.40
Total Payment = 43003.8 +22370.4 = 65374.20
Hence we can see that amount to be paid in case of consolidation is much lower than in case of separate loans.
Total Interest to be paid in case of consolidation = $38967.84-$25000 = $13967.84
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