Say you take out a 20000 loan at a 3 interest rate if the...

Say you take out a $20,000 loan at a 3% interest rate. If the interest is simple, how much will you owe after 5 years? If the interest is compounded yearly, how much will you owe after 5 years?

Transcript

00:01 All right, so in this question, we're asked to calculate the interest that would accumulate in a $20 ,000 loan over a period of five years with a 3 % annual interest rate in two occasions.

00:13 The case when we have a simple interest rate, in the case where we have a compound interest rates of compound interest.

00:23 So the difference between these is where the interest rate applies to.

00:27 So in simple interest rate just means that every year you have to pay 3 % of your principal amount.

00:33 So typically here, the value of sort of simple interest, so total interest, in this case, would be the value of your principal times the value of your interest rate times the period of time.

00:49 So that's how much you would pay in total over the period of end years.

00:53 So in this case, this would be, so $20 ,000, we would pay.

00:58 3 % interest.

01:01 Let me put a cross, yeah.

01:04 So cross 3 % interest over 5 years.

01:08 So 3 % of $20 ,000 is $600.

01:12 So $600 times 5.

01:16 So this $3 ,000.

01:19 So the total simple interest you would accumulate would be $3 ,000.

01:22 So the total amount that you would have to pay in the end would be your original principle.

01:29 So $20 ,000 plus $3 ,000.

01:33 So after five years, you would have paid $23 ,000.