Question

Robin needs $25,000 to start a business. In her search for the best (low cost) loan, she has gathered the following information from three local banks. Which bank would you recommend Robin borrow from? Bank Annual Payment Term (Years) A $9,000 3 B $7,000 4 C $6,000 5 Bank A Bank B Bank C Either Bank A and B since their loan rates are about the same Either Bank A and C since their loan rates are the same

Answer 1

Answer:

Bank A

Explanation:

To recommend from which bank Robin should borrow from, we need to calculate the interest which is the cost of borrowing from each of the banks.

Note:

Interest amount = Total amount to repay - Loan amount .................. (1)

Equation (1) is used as follows:

Bank A:

Interest = ($9,000 × 3) - $25,000 = $27,000 - $25,000 = $2,000

Interest/loan rate = ($2,000 ÷ $25,000) × 100 = 8%

Bank B:

Interest = ($7,000 × 4) - $25,000 = $28,000 - $25,000 = $3,000

Interest/loan rate = ($3,000 ÷ $25,000) × 100 = 12%

Bank C:

Interest = ($6,000 × 5) - $25,000 = $30,000 - $25,000 = $5,000

Interest/loan rate = ($5,000 ÷ $25,000) × 100 = 20%

Recommendation

Robin should borrow from Bank A since it offers the lowest loan rate of 8%.