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.

Answer 1

To reduce the size of monthly loan payments, one should opt for lengthening the maturity of the loan, which spreads out the payment over a longer period but results in more interest paid over the loan's lifetime.

Step-by-step explanation:

The question 'You could reduce the size of your monthly payments by' seeks the best method to decrease the amount paid each month for a loan. The correct answer is D) lengthening the maturity of the loan. When you extend the repayment period of the loan, the total amount due is spread over more months, which generally decreases the size of each monthly payment. However, it is important to note that increasing the loan term typically means that more interest is paid over the life of the loan.

For example, suppose a $300,000 loan has 6% interest convertible monthly with monthly payments over 30 years. Paying off this loan over a longer period would reduce the monthly payments compared to a shorter period. On the other hand, making larger payments than the minimum or paying off the debt faster can result in savings on interest, as you avoid the additional interest that would otherwise accumulate over time.