Yvette is considering taking out a loan with a principal of $16,200 from one of two banks. Bank F charges an interest rate of 5.7%, compounded monthly, and requires that the loan be paid off in eight years. Bank G charges an interest rate of 6.2%, compounded monthly, and requires that the loan be paid off in seven years. How would you recommend that Yvette choose her loan?
Question
Answer:
Monthly payments, P =A/D, where A = Principal amount.D = {(1+r/12)^12t-1}/{r/12(1+r/12)^12t}
For A= $16,200, r = 5.7% = 0.057 and t = 8 years
P = {(1+0.057/12)^12*8-1}/{0.057/12(1+0.057/12)^12*8} = 76.95
Then, P = 16200/76.95 = $210.53
Total amount to be paid = $210.53*8*12 = $20,210.53
Interest to paid = $20,210.53-$16,200 = $4,010.53
For r=6.2% = 0.062, and t= 7 years
P= {(1+0.062/12)^12*7-1}/{0.062/12(1+0.062/12)^12*7} = 68.01
Then, P = 16,200/68.01 = $238.21
Total amount to be paid = $238.01*7*12 = $20,010.05
Interest to be paid = $20,010.05-$16,200 = $3,810.05
A bank loan from Bank G would be favorable on basis that lower interest will be paid. However, higher monthly installments will be paid compared to that of Bank F.
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8 months ago
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