After 154 Minimum Payments, How Much Would Zach Pay for His $910 of Emergency Purchases?

After 154 Minimum Payments, How Much Would Zach Pay for His $910 of Emergency Purchases? How Much Money in Total Interest Did He Pay to the Credit Card Company?

After 154 minimum payments, Zach would pay $16,691.48 for his $910 of "emergency" purchases on his credit card.

The total interest Zach paid to the credit card company is $14,241.48.

Credit card interest is applied using the APR (annual percentage rate), which is applied monthly on the outstanding credit card balance. For Zach, with an advertised APR of 19%, an interest rate of 1.58% is applied to the outstanding balance and added monthly to the total amount he owed. The parameters for Zach's situation are as follows:

• Number of periods (N): 154 months
• Annual Interest Rate (I/Y): 19%
• Initial Principal (PV): $910
• Periodic Payment (PMT): $10

The calculations are as follows

• Future Value (FV): $16,691.48
• The sum of all periodic payments: $1,540 ($10 x 154)
• Total Interest: $14,241.48

What is Interest Rate?

An interest rate is the percentage amount that a lender charges a borrower for the use of borrowed money or the percentage earned on a deposit or investment. It serves as the cost of borrowing for the borrower and the return on investment for the lender. For loans, interest rates can be simple or compound, with compound interest accumulating on both the principal and the accrued interest from previous periods.

The borrower's creditworthiness often determines the interest rate, with lower-risk borrowers receiving lower rates. The annual percentage rate (APR) is a common way to express interest rates on loans, while the annual percentage yield (APY) represents interest earned on deposit accounts, accounting for compounding.

How Interest Works When Borrowing?

When it comes to borrowing money, understanding how interest works is essential. Interest is the price you pay for the privilege of borrowing someone else's money, and it is typically expressed as an annual percentage of the principal amount borrowed. Here's how interest works when borrowing:

• Principal and Interest: Whenever you borrow money, you are required to repay the principal amount, which is the initial sum you borrowed. In addition to the principal, you must also pay interest. Interest is calculated as a percentage of the principal and represents the cost of borrowing. It's the way lenders make a profit from lending money.
• Loan Types: Loans come in various forms, including credit cards, car loans, mortgages, personal loans, and more. Each type of loan may have different terms and conditions that impact the way interest is calculated and repaid.
• Loan Terms: The terms of a loan include the interest rate, the duration of the loan (the repayment period), and the frequency of interest compounding. Interest on loans is usually compounded, which means it is added to the outstanding balance on a regular basis, such as monthly.
• Factors Affecting Interest Rate: Banks and lenders determine the interest rate based on various factors. Your credit score and debt-to-income ratio are significant factors as they help assess the risk of lending to you. The type of lending, whether it's a credit card or a home loan, also influences the interest rate. Additionally, lenders often charge fees for loan establishment, which can be factored into the overall cost of the loan.
• Total Interest Costs: The total amount you pay in interest over the life of the loan can be substantial, especially for long-term loans. It's important to be aware of these costs when considering borrowing money, as they can significantly affect the overall cost of the purchase or investment financed with the loan.

Understanding how interest works when borrowing is crucial for making informed financial decisions, and it helps borrowers assess the affordability of loans and make strategic choices when taking on debt.