Question

A company offers you a $ 6,000 30-month line of credit with an APR of 24%. The bank, on the other hand, offers you $ 12,000.00, tells you to pay 8%, and offers you a maximum of 50 months to pay. You need $ 10,000. What is the minimum monthly payment in both cases? Which of the two offers is the cheapest? Present your arguments.

Answer 1

we can calculate the EMI ( equall monthly installment) using the following formula =

where

E is EMI

P is Principal Loan Amount

r is rate of interest calculated on monthly basis.

n is duration in number of months

EMI for 1st case is calculated as follows :-

= 6000 * (0.24/12) * (1 + 0.24/12)30 / (1+(0.24/12))30-1

= 6000 * (0.02) * (1 + 0.02)30 / (1 + 0.02)30-1

= 120* 1.81136 / 0.81136

EMI =267.89

repayment schedule as follows

the proportion of interest to the loan is = (2037.09 / 6000)100 =33.95%

EMI for 2nd case is calculated as follows :-

= 12,000* (0.08/12) * (1 + (0.08/12))50/ (1+(0.08/12))50-1

= 12,000* (0.0066) * (1 + 0.0066)50/ (1 + 0.0066)50-1

= 79.20 * 1.3894/ 0.3894

EMI =282.589

repayment schedule as follows

when we compare the EMI , itis lower for 1st case.

the proportion of interest to the loan is = (2154.46 / 12000)*100 = 17.95%

when we compare the interset proportion , itis lower for 2nd case. (17.95%), so it is cheapest.