Question

You borrow $4500 for one year from a friend at an interest rate of 2% per month instead of taking a loan from a bank at a rate of 17% per year (compounded monthly). Compare how much money you will save or lose on the transaction.

Answer 1

Interest on Loan taken from Bank = $828

Interest on Loan taken from Friend = $1,080

He will Loose $ 252 ($1080 - $ 828) on the transaction.

Calculations as per following:

Bank Interest Calcuations (Monthly Compounding)
			Amount "$"
Month	Loan Amount	Interest @ 17%	Total Amount
1	4,500	64	4,564
2	4,564	65	4,628
3	4,628	66	4,694
4	4,694	66	4,760
5	4,760	67	4,828
6	4,828	68	4,896
7	4,896	69	4,966
8	4,966	70	5,036
9	5,036	71	5,107
10	5,107	72	5,180
11	5,180	73	5,253
12	5,253	74	5,328
Total		828
Interest Calculation for Loan from Friend
=Loan Amount*2%*12
=4500*2%*12
=1080