A lender offers a choice between two loans. For loan A the lender charges 12% a year compounded 12 times a year. For loan B the lender charges 12.5% a year and compounds it once a year. Is loan A or loan B a cheaper loan for the borrower.
What formula do I use to solve this?
for loan A, i = .12/12 = .01, n = 12
for loan B, i = .125, n = 1
rate for A = 1.01^12 - 1 = .1268..
rate for B = 1.125 - 1 = .125
so what do you think?