Tim will borrow $6200 at 12.5% APR. He will pay it back over 2 years. What will be his Monthly payment be?A) $207.39B) $210.43C) $290.41D) $293.32

Accepted Solution

The correct answer is D) $293.32.

We use the formula P=A/D, where P is the payment amount, A is the amount borrowed, and D is the discount factor.

The discount factor is given by the formula D={[(1+r)^n]-1}/[i(1+i)^n], where i is the monthly interest rate as a decimal number and n is the number of months taken for repayment.

For this problem, we have 12.5%; 12.5%=12.5/100=0.125.
This makes the monthly interest rate, i, 0.125/12=0.01042.
The number of months for repayment, n, will be 2*12=24.

Using these we have D={[1+0.01042)^24]-1}/[0.01042(1+0.01042)^24], which gives us D=21.1375.

We plug this in for D in our payment formula.

Additionally, we know that A=6200, since that is what is borrowed: P=6200/21.1375=293.32.