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Welcome to Brainfuse!
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In this lesson we'll work with simple interest
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And this skill can help you choose a savings account or credit card,
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Take out a loan, and make really informed decisions about where your money goes. It's a good skill to have and we
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Can start with a problem that's real for many college students right now. It involves loans.
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So here it is: A student takes out a loan for $20,000 and
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It has a 6.8% interest rate.
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If he is able to pay off that loan in five years, what will his total cost of interest be?
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So we can use the interest formula to figure this out.
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So we have interest,
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It has three factors. So three factors go into the total cost of interest. One is principal,
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And that is either the money you invest if you are choosing stocks or starting a
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Savings account,
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Or the money you take out for something like a loan.
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So the principal times the rate,
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That is the interest rate,
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So the percent
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That your balance increases each year,
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And the time, the time needed to
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Pay off
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Your loan.
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Back this up a little bit so it's not on the edge.
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So interest equals principal x rate x time. What is this problem asking us to find?
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It says, if he's able to pay off that loan in five years,
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What will his total cost of interest be?
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Okay, so we are looking for the total cost of interest.
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First, we need to find the principal.
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He takes out a loan for $20,000, so that's our principal.
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Okay, and the rate would be a 6.8 interest rate
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But wait. I can't add a percent to this formula, it needs to be in the form of a decimal,
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So we need to draw back
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That decimal point
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Two spaces,
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That makes it .068
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And time, he is going to
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Pay it off well in advance of most people
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And pay it off in 5 years.
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So let's see
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What the total cost of interest is and
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Find out which field this person went into.
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So $20,000
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Times .068
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Equals
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1360, times 5 equals 6800.
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On top of paying back the $20,000 you will
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Have to pay off the interest,
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An interest that totals $6,800.
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Just for your information, most people take at least 10 years to pay those loans back
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And that would be $13,600.
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But the good news is is just a monthly payment and not all at once.
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Okay so we'll call this,
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This would be a sample of a Stafford loan.
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But let's say that like most students, he takes out more than one loan, so he has both a Stafford,
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And let's call it the Perkins,
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So the Perkins loan
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Has a better rate,
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So we'll put
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Interest-p
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Equals
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P R T. Okay so its principal, let's say
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He takes out $22,000.
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Okay the rate is less than the Stafford,
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The rate is 5%.
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Again if it's 5%, we need to
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Cross out the percent and draw back the decimal two places
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To make it .05,
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And time, let's say he does the standard payment, so that's 10 years for this one because the interest is not
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As large
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So that's 22,000
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Times .05
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Times 10. So that's equal to $11,000.
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If we do the Stafford plus the Perkins, it's equal to
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6800 +
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11000
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Which is $17,800
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His total cost in interest for both of those loans
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Would be $17,800 but again it's in monthly payments, this is not
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All at once, as someone coming to the door and saying I'll take that $17,800 and your principal.
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As you can see this skill is very important with money management
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And you can go test it out,
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Both calculating the total cost of interest for one interest rate or more. Thank you for watching this lesson.