Understanding Credit Practice Complete this assessment to review what you've learned. It will not count toward your grade. 3 of 53 of 5 Items Question 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. (1 point) Option has the lower cost of credit, which is $.
Option 2 has the lower cost of credit, which is $6,145.17.
this is not right
Apologies for the previous incorrect response. Let's calculate the cost of credit for each option correctly.
Option 1: One-time payment at the end of a 5-year term with a simple interest rate of 7%.
To calculate the cost of credit for Option 1, we need to find the total interest paid over the 5-year term.
Interest = Principal * Rate * Time
Interest = $9,500 * 0.07 * 5
Interest = $3,325
Therefore, the cost of credit for Option 1 is $3,325.
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.
To calculate the cost of credit for Option 2, we need to find the total amount paid over the 6-year term and subtract the original loan amount.
Total Amount Paid = Monthly Payment * Number of Payments
Total Amount Paid = $166.57 * 72 (6 years * 12 months)
Total Amount Paid = $11,995.04
Cost of Credit = Total Amount Paid - Principal
Cost of Credit = $11,995.04 - $9,500
Cost of Credit = $2,495.04
Therefore, the cost of credit for Option 2 is $2,495.04.
Comparing the two options, we can conclude that Option 2 has a lower cost of credit, which is $2,495.04.