You purchase a car using a $20,000 loan with a 5% simple interest rate.

(a) Suppose you pay the loan off after 4 years. How much interest do you pay on your loan? Show your work.

(b) Suppose you pay the loan off after 2 years. How much interest do you save by paying the loan off sooner? Show your work.

Simple Interest = Cost Price + (Interest Percentage of Cost Price * number of years or months you are paying off)

a) SI = $20 000 + (5% of $20 000 * 4)

SI = $20 000 + ($1000 * 4)

SI = $20 000 + $4000 = $24 000

b) SI = $20 000 + (5% of $20 000 * 2)

SI = $20 000 + ($1000 * 2)

SI = $20 000 + $2000 = $22 000

$24 000 - $22 000 = $2000 that you save!