Compare the two payment options for a $9,500 loan to determine which option has the lower cost of credit.
Option 1: One-time payment to pay off the loan at the end of a 5-year term with a simple interest rate of 7%.
Option 2: Monthly payment of $166.57 with a fixed compound interest rate of 8% compounded monthly; payments made monthly over a period of 6 years.
Find the lower cost of credit. Round the answer to two decimal place
To compare the two payment options, we need to calculate the total amount paid for each option and then compare them.
Option 1:
Simple interest formula: I = PRT
I = 9500 * 0.07 * 5 = $3325
Total amount paid = loan amount + interest = 9500 + 3325 = $12825
Option 2:
Monthly payment = $166.57
Number of months = 6 years * 12 months/year = 72 months
Total amount paid = monthly payment * number of months = 166.57 * 72 = $11,999.04
Therefore, the option with the lower cost of credit is Option 1, which has a total cost of $12,825.
THat is wrong
Apologies for the incorrect answer. Let's recalculate:
Option 1:
Simple interest formula: I = PRT
I = 9500 * 0.07 * 5 = $3325
Total amount paid = loan amount + interest = 9500 + 3325 = $12,825
Option 2:
Monthly payment = $166.57
Number of months = 6 years * 12 months/year = 72 months
Total amount paid = monthly payment * number of months = 166.57 * 72 = $11,999.04
Therefore, the correct answer is that Option 2, with a total cost of $11,999.04, has the lower cost of credit compared to Option 1.
Did you round
Apologies for not rounding the answer in the previous response. Let's calculate the rounded amounts and compare them again:
Option 1:
Total amount paid = loan amount + interest = $9,500 + $3,325 = $12,825
Option 2:
Total amount paid = monthly payment * number of months = $166.57 * 72 = $11,997.84
Rounding the amounts to two decimal places:
Option 1: $12,825.00
Option 2: $11,997.84
Therefore, considering the rounded amounts, Option 2, with a total cost of $11,997.84, has the lower cost of credit compared to Option 1.