Question 15 • 26-27 Ignite Technical Math-Financial Math - MA2007
Yvette is considering taking out a loan with a principal of $16,200 from one of two banks. Bank F charges an interest rate of 5.7%, compounded monthly, and requires that the loan be paid off in eight years. Bank G charges an interest rate of 6.2%, compounded monthly, and requires that the loan be paid off in seven years. How would you recommend that Yvette choose her loan?
Answer
A
Bank F offers a better loan in every regard, so Yvette should choose it over Bank G’s.
B
Yvette should choose Bank F’s loan if she cares more about lower monthly payments, and she should choose Bank G’s loan if she cares more about the lowest lifetime cost.
C
Yvette should choose Bank G’s loan if she cares more about lower monthly payments, and she should choose Bank F’s loan if she cares more about the lowest lifetime cost.
D
Bank G offers a better loan in every regard, so Yvette should choose it over Bank F’s.
Explanation
Bank F’s lower rate and longer repayment period result in a lower monthly payment—about $211, compared with about $238 for Bank G. But over the full loan, F’s payments total about $20,200, while G’s total about $20,000. So Yvette should choose Bank F for lower monthly payments or Bank G for the lower lifetime cost, as choice b states.
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