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 1 has a lower cost of credit, which is $414.60.
Plan 1 has a lower cost of credit, which is $1.534.55.
Plan 2 has a lower cost of credit, which is $414.60.
Pian 2 has a lower cost of credit, which is $823.08.
To determine which plan has a lower cost of credit, we need to calculate the total amount paid over the 5-year period for each plan and subtract the original loan amount of $18,000.
For Plan 1:
Monthly payment = $306.91
Number of months = 5 years * 12 months = 60 months
Total amount paid = Monthly payment * Number of months = $306.91 * 60 = $18,414.60
Cost of credit = Total amount paid - Original loan amount = $18,414.60 - $18,000 = $414.60
For Plan 2:
Monthly payment = $229.02
Number of months = 5 years * 12 months = 60 months
Total amount paid = Monthly payment * Number of months = $229.02 * 60 = $13,741.20
Cost of credit = Total amount paid - Original loan amount = $13,741.20 - $18,000 = -$4,258.80 (negative value)
Based on the calculations, Plan 1 has a lower cost of credit, which is $414.60. Therefore, the correct answer is:
Plan 1 has a lower cost of credit, which is $414.60.