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Using the information on the two loans described in problem 2, how much interest would Shirley have “saved” or been rebated if she could have repaid the loans after 6months?

Problem 2

Shirley, a recent college graduate, excitedly described to her older sister the $1,500 sofa, chair, and tables she found today. However, when asked she could not tell her sister which interest calculation method was to be used on her credit based purchase. Calculate the monthly payments and total cost for a bank loan assuming a 1-year repayment period and 14 percent interest. Now assume the store uses the add-on method of interest calculation. Calculate the monthly payment and total cost with a 1-year repayment period and 12 percent interest. Explain why the bank payment and total cost are lower even though the stated interest rate is higher.


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