Question

Both Sue and Joe are students. Your friend Sue has $20,000 of credit card debt (25% interest charge compounded monthly). Sue plans on paying $400 per month over the next 10 years on this credit card. Your other friend Joe has $40,000 of student loan debt (15% interest charge compounded monthly). Joe plans on paying $645.34 each month for the next 10 years.

A) Which person, Sue or Joe, do you feel will pay the most interest expense and why?
B) Which person (Joe or Sue) has the worst debt situation?

Answer 1

A)

Joe will pay the most interest expense because he is paying more interest than Sue.

B)

Sue has the worst debt situation because he is paying a higher interest rate as compared to Joe.

Step-by-step explanation:

A)

First Calculate the interest payment of both as follow

Interest Payment = Total Installment Payment - Debt Value

Sue

Interest Payment = ( $400 per month x 10 years x 12 months per year ) - $20,000 = $48,000 - $20,000 = $28,000

Joe

Interest Payment = ( $645.34 per month x 10 years x 12 months per year ) - $40,000 = $77,440.8 - $40,000 = $37,440.8

Joe will pay more interest expense as compared to Sue.

B)

Sue has the worst debt situation because he is paying a higher interest rate as compared to Joe.