Question

You decide to borrow $20,000 for a new car. You can select one of the following loans, each requiring regular monthly payments. Installment Loan A: 3-year loan at 7%. Installment Loan B: 5-year loan at 9%. If you can afford to pay up to $650 per month, and you would prefer to minimize the amount of interest you pay, which loan should you take?

Answer 1

A:

Principal = $20,000

Interest rate = 7% (no interest)

Loan term = 3 years = 36 months

1) we calculate the periodic interest cost :

7%= 0,07

over one year the cost = 0.07/12= 0.00583333333= 0.0058

calculate interest over 3 years (36 months): 20000*0.0058*36=4176

total cost: $24176

per month we pay: 24176/36=$671.5555=$671.55

B :

Principal = $20000

Interest rate = 9%

loan term = 5 years =60 months

we calculate the periodic interest cost :

9%= 0,09

over one year the cost = 0.09/12=0.0075

calculate interest over 5 years (60 months):20000*0075*60=9000

total cost: $29000

per month we pay: 29000/60=483.3333=$483.33

loan A is cheaper but you have to pay $671/month,