Question

Avram borrows $14,500 at 5.4% simple interest to open a small business. His bank allows him 9 years to pay back the loan. How much simple interest will Avram have to pay on the loan?

Answer 1

$7,047 simple interest

Answer 2

Avram will have to pay $7,047 simple interest

Explanation:

Simple Interest

Definition: Interest calculated on the original principal only of a loan or on the balance of an account.

Unlike compound interest where the interest earned in the compounding periods is added to the new principal, simple interest only considers the principal to calculate the interest.

The interest earned is calculated as follows:

I=A.r.t

Where:

I = Interest

P = initial principal balance

r = interest rate

t = time

Avram has a principal of P=$14,500 at a simple rate of r=5.4%=0.054 for t=9 years, thus:

I=14,500*0.054*9=7,047

I=$7,047

Avram will have to pay $7,047 simple interest