Ms. Kennedy borrowed $4,909 from a bank to finance a car at an add‐on interest rate4 of 6.105%. The bank calculated the monthly payments as follows:
• Contract amount = $4,909 and contract period = 42 months (or 3.5 years). Thus, add@on interest is = $4,909 (0.06105)(3.5) = $1,048.90.
• Acquisition fee = $25; thus, total loan charge = $1,048.90 + $25 = $1,073.90.
• Total of payments = $4,909 + 1,073.90 = $5,982.90, and monthly installment = $5,982.90/42 = $142.45.
After making the seventh payment, Ms. Kennedy wants to pay off the remaining balance just before making the eighth payment. The following is the letter from the bank explaining the net balance Ms. Kennedy owes:
Dear Ms. Kennedy,
The following is an explanation of how we arrived at the payoff amount on your loan account:
Original note amount………………………………………………….$5,982.90
Less 7 payments @ $142.45 each…………………………………….997.15
……………………………………………………………………………………..4,985.75
Loan charge (interest)……………………………………………………1,073.90
Less acquisition fee……………………………………………………………25.00
……………………………………………………………………………………$1,048.90
