Compare a simple interest rate of 11% and a simple interest rate of 13% for a $400 credit card loan that can be paid in full at the end of a fixed loan length of 2 years. Determine which interest rate has a lower cost of credit. Find the cost of credit.
To compare the cost of credit between the two interest rates, we need to calculate the total amount paid for each rate.
For an 11% interest rate, the formula to calculate the total amount paid is:
Total amount paid = Principal + (Principal * Rate * Time)
Plugging in the values:
Principal = $400
Rate = 11% = 0.11
Time = 2 years
Total amount paid for the 11% interest rate = $400 + ($400 * 0.11 * 2) = $400 + ($88) = $488
For a 13% interest rate, using the same formula:
Total amount paid = Principal + (Principal * Rate * Time)
Plugging in the values:
Principal = $400
Rate = 13% = 0.13
Time = 2 years
Total amount paid for the 13% interest rate = $400 + ($400 * 0.13 * 2) = $400 + ($104) = $504
Therefore, the total cost of credit for the 11% interest rate is $488, while the total cost of credit for the 13% interest rate is $504.
We can conclude that the 11% interest rate has a lower cost of credit compared to the 13% interest rate.