Consider the two payment plans as shown here for an $18,000 auto loan.
Plan 1: Monthly payment of $306.91 over a period of 5 years, which corresponds to a
compound interest rate of 0.9% compounded monthly.
Plan 2: Monthly payment of $229.02 over a period of 5 years, which corresponds to a
compound interest rate of 1.9% compounded monthly.
Determine which plan has a lower cost of credit. Find the lower credit cost.
(1 point)
Plan 2 has a lower cost of credit, which is $414.60.
Plan 2 has a lower cost of credit, which is $823.08.
Plan 1 has a lower cost of credit, which is $414.60.
Plan 1 has a lower cost of credit, which is $1,534.55
To determine which plan has a lower cost of credit, we need to calculate the total amount paid for each plan and subtract the original loan amount.
For Plan 1:
Monthly payment = $306.91
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $306.91 * 60 = $18,414.60
Cost of credit = Total amount paid - Loan amount = $18,414.60 - $18,000 = $414.60
For Plan 2:
Monthly payment = $229.02
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $229.02 * 60 = $13,741.20
Cost of credit = Total amount paid - Loan amount = $13,741.20 - $18,000 = -$4,258.80
Since the cost of credit for Plan 2 is negative, it means that the total amount paid is less than the loan amount. This indicates that Plan 2 has a lower cost of credit than Plan 1.
Therefore, the correct answer is:
Plan 2 has a lower cost of credit, which is $4,258.80 (since it is negative, the cost of credit is actually a savings).