Question

Your friend Sue has $20,000 of credit card debt (25% interest charge compounded monthly). Sue plans on paying $400 per month over the next 10 years on this credit card. Your other friend Joe has $40,000 of student loan debt (15% interest charge compounded monthly). Joe plans on paying $645.34 each month for the next 10 years.

Which person, Sue or Joe, do you feel will pay the most interest expense and why? Which person (Joe or Sue) has the worst debt situation?

Answer 1

Calculate the future value SUE loan as follows:

Loan balance after 10 years is $28,698.85.

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Calculate the future value of Joe loan as follows:

Joe loan balance -0.05.

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Sue not cleared his loan balance and after ten years till he has loan balance of $28,698.85, but joe has no balance.

From the above we can conclude that Sue is paying more interest.

Sue is in the worst debt situation, because he took less amount than Joe. Which is not cleared after ten years also.