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 places as needed.
Option 1:
Total interest paid = loan amount * interest rate * time
= $9,500 * 0.07 * 5
= $3,325
Option 2:
Total interest paid = (monthly payment * number of payments) - loan amount
= ($166.57 * 72) - $9,500
= $11,997.04 - $9,500
= $2,497.04
Therefore, the lower cost of credit is Option 2, with a total interest paid of $2,497.04.