Question

A person needs to borrow $13,000 to buy a car and has determined that monthly payments of $300 are affordable. The bank offers a 3-year loan at 7% APR, a 4-year loan at 7.5%, or a 5-year loan at 8% APR. Which loan best meets the person’s needs?

A. 3-year loan at 7% APR
B. 4-year loan at 7.5%
C. 5-year loan at 8%
D. None of the above

Answer 1

To determine which loan best meets the person's needs, we need to compare the total cost of each loan option. The 3-year loan at 7% APR would be the best choice, as it has the lowest total cost of 14,171.44.

Step-by-step explanation:

To determine which loan best meets the person's needs, we need to compare the total cost of each loan option. Let's calculate the total cost of each loan:

Option A:

• Loan amount: 13,000
• Interest rate: 7% APR
• Loan term: 3 years (36 months)

Using the formula for calculating the monthly payment on a loan, we can determine that the monthly payment for Option A is approximately 394.74.

Total cost = Monthly payment x Loan term = 394.74 x 36 = 14,171.44

Option B:

• Loan amount: 13,000
• Interest rate: 7.5% APR
• Loan term: 4 years (48 months)

Using the same formula, we can determine that the monthly payment for Option B is approximately $318.58.

Total cost = Monthly payment x Loan term = 318.58 x 48 = 15,283.84

Option C:

• Loan amount: 13,000
• Interest rate: 8% APR
• Loan term: 5 years (60 months)

Again, using the formula, we can determine that the monthly payment for Option C is approximately 263.01.

Total cost = Monthly payment x Loan term = 263.01 x 60 = 15,780.60

Based on the calculations, the 3-year loan at 7% APR (Option A) would be the best choice, as it has the lowest total cost of 14,171.44.