Compare a simple interest rate of 11 and a simple interest rate of 13 for a $400 credit loan that can be paid in full at the end of a fixed loan length of two years determine the interest rate has a lower cost of credit find the cost of credit
To determine which interest rate has a lower cost of credit, we need to calculate the total amount paid for each interest rate.
For a simple interest rate of 11%, the formula to calculate the total amount paid (including the principal and interest) for a $400 loan over two years is:
Total amount paid = Principal + (Principal * Interest rate * Time)
Total amount paid = $400 + ($400 * 0.11 * 2) = $400 + ($400 * 0.22) = $400 + $88 = $488
Therefore, at a simple interest rate of 11%, the total cost of credit is $488.
For a simple interest rate of 13%, the calculation is as follows:
Total amount paid = Principal + (Principal * Interest rate * Time)
Total amount paid = $400 + ($400 * 0.13 * 2) = $400 + ($400 * 0.26) = $400 + $104 = $504
Therefore, at a simple interest rate of 13%, the total cost of credit is $504.
Comparing the two, we can see that the interest rate of 11% has a lower cost of credit ($488) compared to the interest rate of 13% ($504).