Question

You need $100,000 to start your own business. Consider the following loan contracts. All your payments are made at the end of each month for 10 years to pay off the loan

Bank A: 12% APR with 3 points

Bank B: 12.3% APR with 1 point

Which bank would you choose?

Bank A:

Bank B:

All work must be shown to get correct

Unfortunately that is all the info given

Answer 1

Hi,

Please find my answer as below:

Annual percentage rate (APR) is the annual rate charged for borrowing an amount. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account.The annual percentage rate (APR) of any loan takes into account the loan’s principal amount, term (length in months or years), interest rate, and any fees, including origination fees.

Points refer fees that needs to pay upfront to reduce your costs long-term. A lower interest rate not only lowers your payment but lowers your total cost of the loan over its life.

Here given conditions:

Loan amount - $100,000

Period - 10 years

Calculation of Total cost of loan from Bank A as below:

Bank A: 12% APR with 3 points

So, Fees for Bank A = $100,000 multiply with 3% (since 3 points) which comes to = $ 3000

Interest paid over life of loan in case of Bank A = $100,000 multiply with 12% multiply with 10 yrs. = $120,000

Calculation of Total cost of loan from Bank B as below:

Bank B: 12.3% APR with 1 points

So, Fees for Bank B = $100,000 multiply with 1% (since 1 points) which comes to = $ 1000

Interest paid over life of loan in case of Bank B = $100,000 multiply with 12.3% multiply with 10 yrs. = $123,000

Repay amount calculation for both Bank A and Bank B as below:

Description	Bank A	Bank B
Fees	3000	1000
Interest paid over life of loan	120000	123000
Loan amount	100000	100000
Total payable amount	223000	224000

So, as per above calculation loan should be taken from Bank A as loan needs to repay total $223,000 which is less costly as compare to Bank B.

Hope this helps :)