Question

Mike has saved $6,000 for a down payment on a car. He qualifies for two car loans. One has a 10% interest rate that does not require a down payment; the other has a 15% interest rate and requires a $5,000 down payment. Mike chooses the first loan and does not make a down payment because he would like to reduce the total cost of the loan as much as possible. Evaluate Mike's decision.
Select the best answer from the choices provided.
A. Mike's decision reduced the total cost of his loan as much as possible because the first loan has a lower interest rate.
B. Mike's decision reduced the total cost of his loan as much as possible because making a down payment would have increased the amount accruing interest.
C. To reduce the total cost as much as possible, Mike should have made a down payment on the first loan even though it was not required.
D. To reduce the total cost as much as possible, Mike should have chosen the second loan even though the interest rate was higher.

Answer 1

Let's assume the car costs $15,000 and it takes 3 years to pay it.
For option A, the total amount to be paid after applying interest is $19965.

For option B, the total amount to be paid after taking out the down payment and applying interest is $20208.75.

The answer is
A. Mike's decision reduced the total cost of his loan as much as possible because the first loan has a lower interest rate.