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Money can be borrowed from a financial institution to buy a car or
build a garage, usually as a personal loan. Of course, some payment,
called interest, has to be made for the use of that money.
This interest
and the amount borrowed is usually paid back in instalments. The total
amount paid back is equal to the amount borrowed plus the interest.
When the interest rate quoted is a
flat rate, it means that the
interest due is calculated as simple interest on the amount of the loan.
We can therefore use the simple interest formula to calculate interest due
on flat rate loans.
Example 19
Calculate the total interest to be paid on a loan of $5000 taken for 4
years at a flat rate of interest of 10% per annum. Hence calculate the
total amount to be paid back.
Solution:
Key Terms
loan, personal loan, instalments,
flat rate of interest |
