Question

James borrows $4,200 to pay his college tuition. He signs a 5-year simple interest loan. lf the monthly payments are $78.40, what is the interest rate on the loan?

Answer 1

The interest rate would be 2.4%.

We start out finding the total amount he pays, including interest. 

78.40/month * 12 months * 5 years = $4704

We take off the amount of principal:
4704-4200 = 504

This is the amount of interest he pays.  Now we use the simple interest formula, I=prt:

504=4200(r)(5)

Multiply 4200 and 5:
504=21000r

Divide both sides by 21000:
504/21000 = 21000r/21000
0.024 = r
2.4% = r

Answer 2

The interest rate on the loan in five (5) years is 2.4%.

Given the following data:

• Amount borrowed (Principal) = $4,200

• Monthly payments = $78.40

• Time = 5 year

To determine the interest rate on the loan in five (5) years:

How to calculate simple interest

First of all, we would determine the total amount of money James paid in 5 years while including the interest.

$Total\;amount = 78.40 \times 12 \times 5$

Total amount = $4704

For the simple interest:

$I = 4200 - 4704$

I = $504

How to calculate interest rate.

Mathematically, simple interest is given by this formula:

$I = PRT$

Where:

• S.I is the simple interest.

• P is the principal or starting amount.

• R is the interest rate.

• T is the time measured in years.

Making R the subject of formula, we have:

$R=\frac{I}{PT}$

Substituting the given parameters into the formula, we have;

$R=\frac{504}{4200 \times 5}$

Interest rate = 0.024 = 2.4%

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