To compare the two payment options, we need to calculate the total cost of credit for each option.
For option one, we will use the formula for simple interest:
Total Cost of Credit = Principal + (Principal * Interest Rate * Time)
Principal = $9500
Interest Rate = 7% = 0.07
Time = 5 years
Total Cost of Credit = $9500 + ($9500 * 0.07 * 5)
Total Cost of Credit = $9500 + ($3325)
Total Cost of Credit = $12825
For option two, we will use the formula for compound interest:
Total Cost of Credit = Principal * ((1 + Interest Rate / n)^(n * Time) - 1)
Principal = $9500
Interest Rate = 8% = 0.08
Time = 6 years
n = 12 (compounded monthly)
Total Cost of Credit = $9500 * ((1 + 0.08 / 12)^(12 * 6) - 1)
Total Cost of Credit = $9500 * ((1.00666666666)^(72) - 1)
Total Cost of Credit = $9500 * (1.59999999999 - 1)
Total Cost of Credit = $9500 * 0.59999999999
Total Cost of Credit = $5700
Therefore, the option with the lower cost of credit is option two, with a total cost of credit of $5700.
Compare the two payment options for a $9500 loan to determine which option has the lower cost of credit.
Option: one time payment to pay off the loan, at the end of a five-year term with a simple interest rate of 7%
Option two: monthly payment of $166.57 with a fixed compound interest rate of 8% compounded monthly payments made monthly over a period of six years
Find the lower credit around the answer to two decimal places needed
1 answer