Question

Veronica has two offers for a $65,000 student loan. The first loan has a 6.3% interest rate for 15 years, and the second loan has a 4.8% interest rate for 20 years. Both loans have interest compounded every month. Veronica is interested in finding the loan that minimizes the amount of interest that she will pay over the life of the loan. Which loan has a lower amount of interest paid?

Answer 1

The second option has a lower amount of interest paid.

In order to determine the loan option that minimizes loan payment, the future value of both loan options has to be determined.

FV = P (1 + r)^nm

FV = Future value  

P = Present value  

R = interest rate  

m = number of compounding

N = number of years  

First loan option

65000( 1 + 0.063/12)^300 = 312,707.21

Second loan option

65000( 1 + 0.048/12)^240 = 169,435.51

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