Question

Judy needs to take out a personal loan for $2,500 for tuition assistance. Her bank has offered her one of the four loan packages outlined in the chart below. Determine which of the four loans will be cheapest for Judy in the long run. All interest rates are compounded monthly. Loan Duration (Months) Interest Rate A 12 9. 50% B 24 8. 75% C 36 7. 75% D 48 6. 60% a. Loan A b. Loan B c. Loan C d. Loan D.

Answer 1

Based on the present values of the personal loan of $2,500 at their different duration and interest rates, the cheapest loan is a. Loan A.

Data and Calculations:

Loan  Duration (Months)   Interest Rate          Payments        Total Interest

                                                                   Monthly      Total        Expense

A                    12                      9. 50%      $219.21     $2,630.51     $130.51

B                   24                      8. 75%      $113.93       $2,734.21   $234.21

C                   36                      7. 75%       $78.05     $2,809.90   $309.90

D                   48                      6. 60%      $59.40     $2,851.33    $351.33

Personal loan amount = $2,500

Thus, Loan A is the cheapest because it has the highest present value and the lowest interest expense.

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