Question

Would it be better to have a loan with 5% interest payback in 2 years, or a loan with 2% interest paid back in five years? Explain. Show work to justify your answer.

Answer 1

Explanation:

If the interest on the loan is simple interest. Both the situation will have equal amount of interest ( 5*2 =10% of total amount). Therefore, it would be better to pay back with 2% interest paid back in five years. However, if the interest is compounded annually, 5% in 2 years will have lesser interest than 2% in 5 years. Hence, Former option would be better.