Question

Answer
An interest rate is essentially that part of the loan which is charged as interest to the person
borrowing the given amount. The interest rate is usually expressed as yearly percentage of the
outstanding loan amount.

Given,

A college pass out owes $22,500 in loans. He is not able to get a job post his graduation and
hence is willing to extend the loan for a time span of 20 years instead of the original 10.

Doubling the repayment period would mean that the student pays approximately 29% less in
monthly payments. However, the total amount of interest on the loan increases by 121%.

In order to calculate the monthly interest rate in such a situation, cross check whether the
given conditions are met.

By hit and trial method, it is found that at an interest rate of about 0.75% per month,

The monthly payment of the 10 year loan (use capital recovery factor of equal payment
series) is:

For a period of 20 years, the monthly payment will be:

Hence, the monthly payment is reduced by an approximate of

The total interest rate for a 10 year loan is

For a 20 year loan, the total interest rate is:

Hence, the total amount of interest rate on the loan increases by an approximate:

Hence, the interest rate being charged in such a situation will be 0.75% per month or 9% per
year.