Question

Compare a simple interest rate of 11% and a simple interest rate of 13% for a $400 credit card loan that can be paid in full at the end of a fixed loan length of 2 years. Determine which interest rate has a lower cost of credit. Find the cost of crediT. (1 point)

Answer 1

To compare the cost of credit for the two interest rates, we need to calculate the total amount to be repaid for each rate.

For a simple interest rate of 11% on a $400 loan over 2 years:
Interest = Principal * Rate * Time
Interest = 400 * 0.11 * 2
Interest = $88

Total amount to be repaid = Principal + Interest
Total amount to be repaid = 400 + 88
Total amount to be repaid = $488

For a simple interest rate of 13% on a $400 loan over 2 years:
Interest = Principal * Rate * Time
Interest = 400 * 0.13 * 2
Interest = $104

Total amount to be repaid = Principal + Interest
Total amount to be repaid = 400 + 104
Total amount to be repaid = $504

Therefore, the interest rate of 11% has a lower cost of credit. The cost of credit for the 11% rate is $88, while the cost of credit for the 13% rate is $104.