Compare a simple interest rate of 11% and simple interest rate of 13% for $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 two interest rates and determine which one has a lower cost of credit, we can calculate the total amount of interest paid for each rate.
For the 11% interest rate:
Principal amount of the loan = $400
Rate of interest = 11%
Loan length = 2 years
Simple interest formula:
Simple Interest = Principal × Rate × Time
Interest for the 11% rate = $400 × 0.11 × 2 = $88
For the 13% interest rate:
Principal amount of the loan = $400
Rate of interest = 13%
Loan length = 2 years
Interest for the 13% rate = $400 × 0.13 × 2 = $104
Therefore, the cost of credit for the 11% interest rate is $88, while the cost of credit for the 13% interest rate is $104.
Since $88 is lower than $104, the interest rate of 11% has a lower cost of credit for this $400 credit card loan that can be paid in full at the end of a fixed loan length of 2 years.