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.

Answer 1

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

For an 11% interest rate, the formula to calculate the total amount paid is:
Total amount paid = Principal + (Principal * Rate * Time)

Plugging in the values:
Principal = $400
Rate = 11% = 0.11
Time = 2 years

Total amount paid for the 11% interest rate = $400 + ($400 * 0.11 * 2) = $400 + ($88) = $488

For a 13% interest rate, using the same formula:
Total amount paid = Principal + (Principal * Rate * Time)

Plugging in the values:
Principal = $400
Rate = 13% = 0.13
Time = 2 years

Total amount paid for the 13% interest rate = $400 + ($400 * 0.13 * 2) = $400 + ($104) = $504

Therefore, the total cost of credit for the 11% interest rate is $488, while the total cost of credit for the 13% interest rate is $504.

We can conclude that the 11% interest rate has a lower cost of credit compared to the 13% interest rate.