Question

You could reduce the size of your monthly payments by:

A) agreeing to a higher interest rate.
B) borrowing the same amount of money but for a shorter period of time.
C) borrowing more money initially for the same period of time.
D) lengthening the maturity of the loan.

Answer 1

The size of monthly loan payments can be reduced by lengthening the maturity of the loan to spread the repayments over more time, leading to smaller installments but potentially higher overall interest costs.The correct answer is option A.

Step-by-step explanation:

The question revolves around the concept of how to reduce the size of monthly payments on a loan. The correct option to achieve this is to lengthen the maturity of the loan, which means choosing a longer payment period for borrowing the same amount of money.

When the maturity of the loan is increased, payments are spread over a larger number of months or years, which generally results in smaller monthly payments. This is based on the idea that the principal and interest are divided across more payment periods.

However, this also means that in the long run, the total amount paid in interest might be higher due to the extended term. Conversely, borrowing the same amount of money for a shorter period, agreeing to a higher interest rate, or borrowing more money initially, would each lead to higher monthly payments, not lower ones.

To summarize, lengthening the term of a loan effectively reduces the monthly payment obligation, even though it might lead to higher interest costs over the life of the loan.The correct answer is option A.