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erahn1
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Location: United States
Schools: Tuck '17 (D) Carroll '17 (M$)
GMAT 1: 720 Q46 V42
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WE:Corporate Finance (Journalism and Publishing)
07 Aug 2014, 05:58
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I have twice seen questions which seem to ignore the subtraction of down payment in interest rate problems.
For example, a $1,000 loan with a 20% down payment should have its interest calculated on the remaining $800 dollars. Let say the simple interest rate was 10% annually and there were 10 payments, this should be 10 payments of $80 dollars, but in the questions that I have seen, it indicates that it is 10 payments of $100 dollars.
Is it GMAT convention to not subtract the down payment amount when calculating interest?
https://gmatclub.com/blog/2014/08/gmat- ... AT+Club%29
Seems to be an example of this, and I have seen it elsewhere as well.
Eric
For example, a $1,000 loan with a 20% down payment should have its interest calculated on the remaining $800 dollars. Let say the simple interest rate was 10% annually and there were 10 payments, this should be 10 payments of $80 dollars, but in the questions that I have seen, it indicates that it is 10 payments of $100 dollars.
Is it GMAT convention to not subtract the down payment amount when calculating interest?
https://gmatclub.com/blog/2014/08/gmat- ... AT+Club%29
Seems to be an example of this, and I have seen it elsewhere as well.
Eric
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07 Aug 2014, 21:34
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erahn1
No, these questions don't ignore the down payment. The calculations are different here. Let me explain:
When you take a payment scheme where you pay in a staggered manner, obviously you pay some interest on the sale price. Say I buy an object of $1000, I might need to pay a total amount of $1200 over 11 months. I have to pay extra to account for the delayed payment. So schemes are built by including the interest.
The first scheme includes a downpayment of 20% of the purchase price and 10 monthly payments of 10% each
In this case, if the object costs $1000, you will pay $200 downpayment and then $100 for 10 months i.e. a total payment of $1200.
If you subtract the downpayment before giving 10 monthly payments of 10%, you pay $200 and then $80 for 10 months. You end up paying $1000 total.
The schemes don't work like this. They are structured in a way that they don't mention interest but they do charge interest. They make calculations easy by giving you details all based on original sale price.
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Hi there,
This topic has been closed and archived due to inactivity or violation of community quality standards. No more replies are possible here.
Where to now? Join ongoing discussions on thousands of quality questions in our Quantitative Questions Forum
Still interested in this question? Check out the "Best Topics" block above for a better discussion on this exact question, as well as several more related questions.
Thank you for understanding, and happy exploring!
