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11. Finance charge calculation - The discount method The discount method is a method for computing Interest on an installment loan. With the discount method,
11. Finance charge calculation - The discount method The discount method is a method for computing Interest on an installment loan. With the discount method, you calculate the Interest based on a discount rate that is multiplled times the amount borrowed and by the number of years to repay the loan. The Interest is then subtracted from the amount of the loan, and only the difference is given to the borrower. Thus, the Interest Is pald up front. For loans using the discount method, the monthly payment amount is calculated based on the entire loan amount, including the discounted Interest. Consider the following example: Jalll Ngumi from Salt Lake City, Utah, borrows $4,500 (Including Interest) for two years (24 months) at an interest rate of 11% per year. The loan uses the discount method for determining the amount of Interest, How much of the loan amount ($4,500) consists of Interest? $ How much of the loan is actually glven directly to Jalli? $ What is the monthly payment (rounded to the nearest penny), assuming 24 monthly payments? $
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