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33% (00:00) correct
67% (01:07) wrong based on 8 sessions
Louie takes out a three-month loan of $1000. The lender charges him 10% interest per month compounded monthly. The terms of the loan state that Louie must repay the loan in three equal monthly payments. To the nearest dollar, how much does Louie have to pay each month?
A)333 B)383 C)402 D)433 E)483
Again can someone please explain the concept behind solving these problems? Unfortunately, I again don't have an answer for this question.
Actually what I wrote above assumes that Louie doesn't start repaying the loan immediately, instead he waits until all the interest has compounded. This is not necessarily correct since usually you start paying off loans as soon as you take them out. This means that you pay off some principle each month and therefore your interest is lower.
Here's the calculation for that case, assume monthly payment is X.
After 1st month: (1000)(1.1)-X = 1100-X After 2nd month: (1100-X)(1.1)-X = 1210-2.21X After 3rd month: (1210-2.21X)(1.1)-X = 1331-3.31X
Now, the amount after the last payment in 3rd month must bring the total to 0. Hence:
1331-3.31X = 0 X = 1331/3.31 = 402.11
The answer is C. However, I think this is a poorly worded question and on the real GMAT, they would specify that the payment is to be started immediately after loan inception.