ScholarMatic: Explanation & Answer
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Credit cards allow people to purchase things that they can almost afford. Things are bought with the feeling that they will soon be paid for. However they also fuel the temptation to buy things that perhaps should have been resisted. This is especially true with the type of credit card that allows a consumer to spend freely for 6 months without being hit by interest. If the account can be zeroed out in that time, the card has given consumer an interest free loan. But it is possible that the consumer has spent up to the limit of the card, say $10,000 and must now pay this off at 24% APR.
- a) What is the monthly interest rate corresponding to 24% APR? (Simply divide by 12.)
- b) How much interest is owed after 1 month on the $10,000? (This just needs a multiplication.)
- c) Suppose the consumer is able to make a payment of $200 per month against this $10,000 loan. How long will it take the consumer to pay off the debt? (This just requires some thought.)
Having maxed out one credit card, the consumer is tempted by an offer of a second credit card (from another bank) at 24% APR with a $7500 limit. And then, maybe, after that a similar offer…
Resist!!
Debt consolidation services are often the only way out for people who find themselves with a handful of cards and the ability only to pay the minimum required ever month. There is no alternative for such folks than to seek help as they will never be able to get out of the position that they find themselves in.
A service may pay off all the loans – say $25,000 worth so that the consumer now only has one debt to pay – the one to the consolidation service. The difference is that they may now only pay 12% APR (1% a month) so that instead of paying $500 a month (2% of $25,000) to simply pay the interest, they will be able to pay off the loan.
You are awarded one extra point if the Assignment turned in on time. Papers will be accepted up to one day late (without the extra point).
Papers will not be accepted more than one day late.
- d) How many months will it take to pay off the $25,000 loan at $500 per month at 12% APR compounded monthly?
- e) When the loan is paid off, how much interest has gone to the Debt Consolidation Service?
- f) Are Debt Consolidation Services a profit making business or a charitable organization?
ScholarMatic: Explanation & Answer
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