Question

Ricky is taking out a personal loan for $12,000 to remodel his kitchen. He would like the lowest monthly payment possible, even if it means a bigger finance charge in the end. His bank has offered him a loan at 13% interest for 36 months or 12% interest for 60 months, both of which are compounded monthly. Which of the following statements most accurately describes what Ricky should be thinking?
a.
More payments with the 60 month loan will give him the lowest monthly payment.
b.
Fewer payments with the 36 month loan will give him the lowest monthly payment.
c.
The 60 month loan comes with a bigger finance charge and, thus, a bigger monthly payment.
d.
The 36 month loan comes with a bigger finance charge and, thus, a bigger monthly payment.

Answer 1

Answer: (a).

Reason: the 36-month loan payment (r = 0.13/12) is about $404/month, while the 60-month loan (r = 0.12/12) is about $267/month. The 60-month loan therefore has the lower monthly payment, though its total finance charge is larger (about $4,000 vs ≈$2,550).