To compare the two payment options, we need to find the total amount paid for each option and then calculate the cost of credit for each option.
Option 1:
Simple Interest = Principal x Rate x Time
Simple Interest = $9,500 x 0.07 x 5
Simple Interest = $3,325
Total amount paid = Principal + Interest
Total amount paid = $9,500 + $3,325
Total amount paid = $12,825
Cost of Credit = Total amount paid - Principal
Cost of Credit = $12,825 - $9,500
Cost of Credit = $3,325
Option 2:
We can use the compound interest formula to calculate the total amount paid.
Total amount paid = Monthly payment x Number of payments
Total amount paid = $166.57 x (12 payments/year) x 6 years
Total amount paid = $166.57 x 12 x 6
Total amount paid = $11,996.56
Cost of Credit = Total amount paid - Principal
Cost of Credit = $11,996.56 - $9,500
Cost of Credit = $2,496.56
Comparing the cost of credit for both options, we have:
Option 1: $3,325
Option 2: $2,496.56
The lower cost of credit is option 2, with a cost of credit of $2,496.56.
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 answer