Determine the cost of credit for a 2-year, $5,000 credit card loan with a monthly payment of $257.67, which corresponds to a fixed compound interest rate of 21.3% compounded monthly. Round the answer to two decimal places as needed.(1 point) The cost of credit is $.
To determine the cost of credit, we need to calculate the total amount paid in monthly payments, and then subtract the original loan amount.
The monthly payment is $257.67, and the loan term is 2 years, which is equivalent to 24 monthly payments.
Total amount paid in monthly payments = Monthly payment * Number of payments
= $257.67 * 24
= $6,184.08
Now, subtract the original loan amount to find the cost of credit:
Cost of credit = Total amount paid in monthly payments - Original loan amount
= $6,184.08 - $5,000
= $1,184.08
Therefore, the cost of credit is $1,184.08.
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)
Let's first calculate the cost of credit for each option and compare them to determine which one has the lower cost.
Option 1: One-time payment at the end of a 5-year term with a simple interest rate of 7%.
The simple interest formula is: Interest = Principal * Rate * Time
Interest = $9,500 * 0.07 * 5
Interest = $3,325
Cost of credit for Option 1: $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.
We need to calculate the total amount paid in monthly payments and subtract the original loan amount to find the cost of credit.
Monthly payment = $166.57
Number of payments = 6 years * 12 months/year
Number of payments = 72
Total amount paid in monthly payments = Monthly payment * Number of payments
= $166.57 * 72
= $11,997.04
Now, subtract the original loan amount to find the cost of credit:
Cost of credit for Option 2 = Total amount paid in monthly payments - Original loan amount
= $11,997.04 - $9,500
= $2,497.04
Cost of credit for Option 2: $2,497.04
Comparing the two options, we can see that Option 2 has the lower cost of credit with a cost of $2,497.04, while Option 1 has a cost of $3,325.
Therefore, the lower cost of credit is for Option 2.