Question

Bianca took out a $2,600 unsubsidized Stafford loan. She will be attending school for four years, and she wishes to have the loan paid off five years before its normal ten-year duration is finished. The loan has an interest rate of 6. 2%, compounded monthly. How much will she have to pay monthly to avoid interest capitalization? a. $12. 40 b. $19. 29 c. $13. 43 d. $17. 36.

Answer 1

Interest capitalization is defined as the unpaid interest when added to the principal amount of the loan. It increases the overall cost of the loan.

Bianca will have to pay $13.43 monthly to avoid interest capitalization.

Given that:

Principal value of loan = $2600

Maturity Time = 10 years = 120 months  

Interest rate = 6.2% = 0.062

Now, to find the amount of payment by using the formula:

$\rm Payment&=\rm \dfrac{Rate\times Principal}{1-(1+rate)^{time}}\\\\\\\rm Payment&=\rm\dfrac{0.062 \times 2600}{1-(1+rate)^{120}}\\\\\rm Payment &= \rm \161.32$

Total payment that is to be paid in 1 year:

$\rm Monthly\; Payment &=\rm\dfrac{161.32}{12}&= \ 13.43$

Thus, the payment that Bianca has to pay is  $13.43.

To know more about interest capitalization, refer to the following link:

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Answer 2

Answer:

Interest capitalization is defined as the unpaid interest when added to the principal amount of the loan. It increases the overall cost of the loan. Bianca will have to pay $13.43 monthly to avoid interest capitalization.Given that:Principal value of loan = $2600Maturity Time = 10 years = 120 months  Interest rate = 6.2% = 0.062Now, to find the amount of payment by using the formula:Total payment that is to be paid in 1 year:Thus, the payment that Bianca has to pay is  $13.43.Explanation: