Pre-Algebra
Personal financial literacy
Cost of credit and loan repayment
20 practice questions
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Theory + worked examples
Cost of Credit and Loan Repayment
Texas Pre-Algebra (TEKS) • Standard 8.12(B) • Financial Literacy
Cost of Credit and Loan Repayment is a topic in Financial Literacy in the Texas Essential Knowledge and Skills. It is aligned to Standard 8.12(B), which requires students to calculate the cost of credit and total loan repayment.
Repaying a loan costs the principal plus interest; the cost of credit is the total repaid minus the amount borrowed.
Theory
A loan payment covers part of the principal plus interest. The cost of credit is the total repaid minus the amount borrowed.
A longer term lowers the monthly payment but raises the total interest.
The cost of credit.
Longer terms cost more.
Cost of credit:
\[\text{cost}=\text{total repaid}-\text{principal}\]
Total repaid = payment × number of payments.
How to find the cost of credit
- Multiply the payment by the number of payments.
- That is the total repaid.
- Subtract the amount borrowed.
- The result is the interest cost.
Example 1 — Total repaid
\(\$200\)/month for \(24\) months. Total repaid?
Solution
Multiply.
| \(200\cdot24\) | \(=\) | \(\$4800\) |
Example 2 — Cost of credit
If the loan was \(\$4000\), find the interest cost.
Solution
Total minus principal.
| \(4800-4000\) | \(=\) | \(\$800\) |
Example 3 — Longer term
Does a longer loan cost more or less interest?
Solution
More interest overall.
Example 4 — Monthly trade-off
What is the benefit of a longer term?
Solution
A lower monthly payment.
Common pitfalls
Longer terms cost more total interest.
Cost of credit is not the monthly payment.
Total repaid exceeds the amount borrowed.
Frequently asked questions
What is the cost of credit?
Total repaid minus the amount borrowed.
How do I find the total repaid?
Payment times the number of payments.
Does a longer loan cost more?
Yes, in total interest.
What does a longer term lower?
The monthly payment.
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