Question

Because she has a good credit history, Beatrice was approved for a loan with a low interest rate. Assuming she can choose the loan term and the amount of the down payment, what will help Beatrice reduce the total cost of the loan the most?

A) Choosing a longer loan term.
B) Choosing a shorter loan term.
C) Making a larger down payment.
D) Making a smaller down payment.

Answer 1

To minimize the total cost of a loan, choosing a shorter loan term and making a larger down payment are crucial since they reduce the borrowed amount and the time over which interest accumulates.

Step-by-step explanation:

To reduce the total cost of the loan the most, Beatrice should consider B) Choosing a shorter loan term and C) Making a larger down payment. With a shorter loan term, Beatrice will pay less in interest over the life of the loan since the principal will be repaid faster. A larger down payment also reduces the amount borrowed, resulting in less total interest paid. As interest compounds over time, reducing the principal as quickly as possible minimizes the overall cost of the loan. For instance, a shorter term may mean higher monthly payments, but it also means fewer payments and therefore less interest accumulation. Conversely, a longer term dilutes the payments over more installments leading to more interest paid.