Question

16 Credit Card Offers Randy just cancelled his credit card with a large bank. A week later, a representative of the bank called Randy with an offer of a "better" credit card that will advance Randy $2,000 when he accepts it. Randy could not refuse the offer and several days later receives a check for $2,000 from the bank. With this money, Randy decides to buy a new computer. At the next billing cycle (a month later), the $2,000 advance appears as a charge against Randy's account, and the APR is stated to be 21% (compounded monthly). At this point in time, Randy elects to pay the minimum monthly payment of $40 and cuts up the credit card so that he cannot make any additional purchases. (a) Over what period of time does this payment extend in order to repay the $2,000 principal? (b) If Randy decides to repay all remaining principal after having made 15 monthly payments, how much will he repay?

Answer 1

(a) Herein,

The monthly payment charged to Randy's card is 21%/ 12 = 1.75%.
Monthly payments= $40
Loan Principal= $2000.
$2000= $40 (P/A, 1.75%, N)
This is easily solved using the NPER* (Rate, Payment, Principal ) function in Excel sheet.

NPER(1.75%, -40, 2000) = 119.86.

Thus, this payment will extend till 120 months in order to repay the whole $2000 principal.

(b) Total payments made= 15

Total payments pending= 105

Total amount to repay= $40(P/A, 1.75%, 105) = $1,915.96.

Thus, Randy has to repay $1915.96.

*The Microsoft Excel NPER function returns the number of periods for an investment based on an interest rate and a constant payment schedule.