Marys credit card situation is out of control because she ca

Mary\'s credit card situation is out of control because she cannot afford to make her monthly payments. She has three credit cards with the following loan balances and APRs: Card 1, S4,300, 21%; Card 2?$5,500 25%, and Card 3 $3.200, 19% nterest compounds monthly on a loan balances. A credit card loan consolidation company has captured Mary s attention by stating they can save Mary 26% per month on her credit card payments. This company charges 17.5% APR. Is the company\'s claim correct? Assume a 10-year repayment period. Mary\'s current minimum monthly payments are s.(Round to the nearest cent)

Solution

Mary missed her monthly payments on all the 3 cards.Mary\'s loan balance on card 1 is $4300 with an APR of 21% or 0.21.Hence her monthly payment on card 1=(0.21*$4300)/12=$903/12=$75.25

She has a loan balance of $5,500 with an APR of 25% or 0.25 on card 2.Therefore,Mary\'s minimum monthly payment on card 2=(0.25*$5,500)/12=$1375/12=$114.58

Mary\'s loan balance on card 3 is $3200 with an APR of 19% or 0.19.Hence,her minimum monthly payment on card 3=(0.19*$3200)/12=$608/12=$50.66

The total loan balance for Mary including all the 3 cards=($4300+$5500+$3200)=$13,000

Thus,Mary\'s minimum monthly payment on all tye 3 cards=($75.25+$114.58+$50.66)=$240.49 or $240.5 rounding off

Now,if Mary decides to avail the service of the loan consolidation company then it would save her 26% or 0.26 of her monthly payments on all 3 cards.Hence,Mary\'s minimum monthly payments after availing the service of the loan cosolidation company=$240.5-(0.26*$240.5)=($240.5-$62.53)=$177.97 or $178 approximately

But the company charges an APR of 17.5% or 0.175 on her total loan balance from all 3 credit cards.Thereofore,Mary\'s minimum monthly payment to the consolidation company=(0.175*$13,000)/12=$2275/12=$189.58 approximately

Therefore,Mary\'s total minimum monthly payment if she avails the service of the loan consolidation company=($178+$189.58)=$367.58

Recall that Mary\'s total minimum monthly payment without the service of the loan consolidation company was $240.5

Hence,clearly to save 26% on her total monthly payments on all 3 cards or $62.53,Mary is basically spending ($367.58-$240.5)=$127.08 more as her monthly payments if she avails the service of the loan consolidation company.Thus,Mary is better off making at least her monthly minimum interest payments on all the 3 cards without taking the service of the company.

Now,observe that the consolidation company claims to save Mary $62.53 but makes a monthly revenue of $189.58 as monthly interest payment from Mary thereby proving to be a profitable venture for the copmany.The loan repayment period is 10 years meaning that mary has to repay the entire loan balance of $13,000 in addition to all the extra interest charges that would accrue upto the end of the repayment period.