Consider the two payment plans as shown here for an $18,000 auto loan

Question

Plan 1: monthly payments of $306.91 over period of five years which corresponds to a compound interest rate of 0.9% compounded monthly
Plan 2: monthly payment of $229.02 over a period of five years which corresponds to a compound interest rate of 1.9% compounded monthly
Determine which plan has the lower cost of credit find the lower cost of credit

Answer 1

To find the lower cost of credit, we need to calculate the total amount paid for each payment plan.

For Plan 1:
Monthly payment = $306.91
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $306.91 * 60 = $18,414.60

For Plan 2:
Monthly payment = $229.02
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $229.02 * 60 = $13,741.20

The lower cost of credit is the total amount paid that is lower. Therefore, Plan 2 has the lower cost of credit, which is $13,741.20.