Question

Joe is considering taking out along with the principal of $15,500 From one of two banks. Bank A charges and interest rate of 6%, compounded monthly, and requires at the loan be paid off in eight years. Bank B charged as an interest rate of 6.5%, compounded monthly, and requires that the loan be paid off in seven years. What are the benefits for each banks offer in terms of payment amounts and/or amounts paid?
Bank A_________________
Bank B_________________
Please answer step by step as thoroughly as you can. I would greatly appreciated it.

Answer 1

Answer:

Step-by-step explanation:

We would apply the formula for determining compound interest which is expressed as

A = P(1+r/n)^nt

Where

A = total cost of the loan at the end of t years

r represents the interest rate.

n represents the periodic interval at which it was compounded.

P represents the principal or initial amount taken as loan.

Considering bank A's offer

From the information given,

P = $15500

r = 6% = 6/100 = 0.06

n = 12 because it was compounded 12 times in a year.

t = 8 years

Therefore,

A = 15500(1 + 0.06/12)^12 × 8

A = 15500(1 + 0.005)^96

A = 15500(1.005)^96

A = $25019.2

The interest paid is

25019.2 - 15500 = $9519.2

Considering bank B's offer

From the information given,

P = $15500

r = 6.5% = 6.5/100 = 0.065

n = 12 because it was compounded 12 times in a year.

t = 7 years

Therefore,

A = 15500(1 + 0.065/12)^12 × 7

A = 15500(1 + 0.0054)^84

A = 15500(1.0054)^84

A = $24366

The interest paid is

24366 - 15500 = $8866

The interest that would by paid on bank B's offer is lower than that of bank A and the duration of the loan offer from bank B is shorter than that of bank A.

Therefore,

Bank A gives you more time to pay up the loan and you end up paying more interest

Bank gives you lesser time to pay up the loan and you end up paying lesser interest.