Question

Describe the effect on the amount of the payment and the total cost of the loan for

each of the following situations. (6 marks)
a. The interest rate changes to 7.9% from 6.5%.
b. A down payment of $2500 was paid.
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c. The length of the loan was increased to 4 years instead of 3 years.

Answer 1

a. both go down

b. both go down

c. payment goes down; total cost goes up.

Explanation:

a.

When the rate goes down, the payment and total paid both go down.

__

b.

When a down payment is made, the loan value goes down, so the payment and total paid both go down.

__

c.

When the loan period increases, the principal is borrowed for a longer period, so the total interest goes up. When payback occurs over a longer period, the payment amount goes down

The payment goes down, but the total paid goes up.