Answer : The correct Option is A.
Step-by-step Explanation :
To solve this we are going to use the monthly payment formula:
where, Principal is the amount of the loan
n is the number of periods.
- Option A. 13% interest for 36 months compounded monthly
Ricky is taking out a personal loan for $12,000 and term of the loan is 36 months ⇒ n = 36. To find the rate per period, we first need to convert the interest rate to decimal form ⇒ Rate = 0.13.
Now since the bank is charging him the interest rate for the 36 months, we just need to divide the interest rate (in decimal form) by the number of months (36) to find the rate per period
So, putting all these values in the formula, We get monthly payment of loan A = $356.07
- Option B : 12% interest for 60 months compounded monthly
interest rate in decimal form = 0.12
By replacing the values in formula the monthly payment of loan B is $212.44
- Option C and Option D are obviously denied as the financial charge is not effected by the monthly payments so ricky will not be thinking about the financial charge.
Now, Monthly payments of loan B are significantly low than that of monthly payments of loan A.
So, we can conclude that the correct answer is a. More payments with the 60 month loan will give him the lowest monthly payment.