Question

Ricky is taking out a personal loan for $12,000 to remodel his kitchen. He would like the lowest monthly payment possible, even if it means a bigger finance charge in the end. His bank has offered him a loan at 13% interest for 36 months or 12% interest for 60 months, both of which are compounded monthly. Which of the following statements most accurately describes what Ricky should be thinking?

Answer 1

The answer is:

a. More payments with the 60 month loan will give him the lowest monthly payment.

Explanation:

Answer 2

Let me help you, but first I will explain the formula used to calculate monthly compound interest.

The formula used to calculate compound monthly compound interest is

a=p(1+r/n)^nt

P Represents the principal

R Represents the rate (in decimal)

N is basically 12 months

T Represents the time (in years)

Let's plug the numbers in.

First statement

"His bank has offered him a loan at 13% interest for 36 months"

12000(1+.13/12)^(12)(3)

12000(1+.13/12)^(12)(3) = $17,686.64

Second statement

"12% interest for 60 months"

Plug in the numbers into the formula.

12000(1+.12/12)^(12)(5)

12000(1+.12/12)^(12)(5) = 21,000.36

Answer

The answer would be "13% interest for 36 months" as it is much lower compared to the other statement.