## Calculating Interest:

Interest is calculated on a loan by multiplying the principal amount and the annual interest rate. If compound interest is used, each interest calculation would be based on both the principal amount and the interest amount accumulated to date.

If you wait until year 3 to pay off the loan, annual interest would be calculated as follows (assuming compound interest and an interest rate increase of 1% per year starting with 9%):

Year 1 interest = $2,000 * 9% =$180

Year 2 interest = ($2,000 +$180) * 10% = $218 Year 3 interest = ($2,000 + $180 +$218) * 11% = $263.78 At the end of year 3, the total amount owed including interest would be calculated as follows: Principal + Year 1 interest + Year 2 interest + Year 3 interest =$2,000 + $180 +$218 + $263.78 =$2,661.78