Jalisa went to the bank to take out a car loan. The loan officer suggested ywo options: 5.5% for 5 years or 2% for 10 years . which option should she take. Why?

Answer 1

To determine which option Jalisa should take, we need to compare the cost of each loan.

Option 1: 5.5% interest for 5 years
To calculate the cost of this loan, we multiply the loan amount by the interest rate and the loan duration:
Cost = Loan amount * Interest rate * Loan duration

Option 2: 2% interest for 10 years
Similarly, we calculate the cost of this loan using the same formula:
Cost = Loan amount * Interest rate * Loan duration

To make a fair comparison, we assume that the loan amount is the same for both options.

Now let's analyze the options:

Option 1:
Cost = Loan amount * 5.5% * 5 years

Option 2:
Cost = Loan amount * 2% * 10 years

Comparing the formulas, we can see that the only difference is the interest rate and loan duration. Option 1 has a higher interest rate but a shorter loan duration, while option 2 has a lower interest rate but a longer loan duration.

To determine the better option, we need to calculate the actual costs for both options.

Let's assume the loan amount is $10,000:
For Option 1:
Cost = $10,000 * 5.5% * 5 years = $2,750

For Option 2:
Cost = $10,000 * 2% * 10 years = $2,000

Based on the calculations, Option 2 has a lower cost (interest paid) of $2,000 compared to Option 1's cost of $2,750.

Therefore, Jalisa should choose Option 2: 2% interest for 10 years because it has a lower overall cost.