Understanding Barry's 10-Year Straight Loan: A Closer Look

After taking out a 10-year straight loan for $60,000 at 4%, how much does Barry owe at the end of the term if he pays $200 monthly?

• A. $0
• B. $24,000
• C. $60,000
• D. $84,000

Answer: (C)

To understand why Barry would owe $60,000 at the end of a 10-year straight loan term with the terms provided, it’s important to first clarify what a straight loan is. In a straight loan, the borrower pays only the interest on the principal during the loan term, with the principal amount due at the end of the term. In this case, Barry took out a loan of $60,000 at an interest rate of 4%. Since he is paying $200 monthly, this payment typically goes toward the interest only without any allowance for the principal to be paid down during the loan term. Thus, over the entire 10 years, Barry will consistently pay interest on the original loan amount, which does not reduce the principal. At the end of the 10-year term, Barry would need to pay back the original principal of the loan, which remains at $60,000 because none of it has been paid down through his monthly payments. Therefore, the total amount owed at the end of the term is indeed $60,000. This illustrates how straight loans operate and confirms why Barry's remaining balance aligns with the original loan amount, irrespective of the monthly interest payments he made. In contrast, other choices reflect amounts that

Barry has taken out a straight loan for $60,000 at a 4% interest rate, making $200 monthly payments. You might be asking, "Why does he still owe the full $60,000 at the end of ten years?" Well, let’s break it down.

First off, let’s clarify what a straight loan is. Unlike other loans, where you chip away at both the principal and interest over time, a straight loan has you only focusing on interest payments throughout the loan term. It’s like being in a relationship where you’re only paying attention to the icing and not the cake—you might get to sweeten your payments, but the core amount doesn’t budge until the end.

So Barry is paying $200 each month, which might sound like he’s doing a good job chipping away at his debt. But here’s the catch: those monthly payments are purely interest. At 4% on $60,000, Barry’s monthly interest payment is roughly $200. Essentially, he’s just paying to keep the lender happy while leaving the principal untouched. This means, over the entire ten years, he’s just sitting on that $60,000 without reducing the base amount.

At the end of the ten-year term, you guessed it—Barry will still owe the full $60,000. Isn’t that fascinating? It’s a common misconception that paying regular monthly amounts automatically reduces debt. So many new investors may find themselves in a similar pickle, thinking monthly payments mean they’re making progress when, in fact, they may still owe the original balance.

Understanding straight loans is crucial, especially for those studying for the Arizona Real Estate License Exam. This concept pops up often in mortgage discussions, and grasping it not only helps pass the exam but equips future real estate agents with essential knowledge for advising clients accurately.

So, remember this when you encounter questions about loans: knowing the difference between paying interest and paying down principal can change every financial conversation.

In summary, the answer to what Barry owes after ten years? That’s a rock-solid $60,000, untouched and waiting until he settles the score. Isn’t financial literacy an exciting area to delve into? It’s not only about numbers; it often reveals fundamental truths about managing money effectively.