Question

Jackson took out a 6-year loan for $77,000 at an APR of 10.3%, compounded monthly, while Leo took out a 6-year loan for $82,000 at an APR of 10.3%, compounded monthly. Who would save more by paying off his loan 10 years early?

A) Jackson would save more, because he borrowed $5000 more in principal.
B) Jackson would save more, because he borrowed $5000 less in principal.
C) Leo would save more, because he borrowed $5000 less in principal.
D) Leo would save more, because he borrowed $5000 more in principal.

Answer 1

D) Leo would save more, because he borrowed $5000 more in principal.

Step-by-step explanation:

I guess the question should say who would save more by paying 1 year earlier, since they are 6-year loans, the concept remains the same.

Leo borrowed $82,000, while Jackson borrowed $77,000. That means that Leo borrowed $5,000 more.

The more you borrow, the higher the interest payment. If both loans have the same APR 10.3% compounded monthly, then the only difference results from the principal amount. Since Leo pays more interest, if he decides to pay the loan earlier, he will save more money.