Sam is comparing the costs of two loans. The principal amount of each loan is $5,000. One is due in one year and the other is due in four years. Both have the same stated rate of annual interest. Which of the following is true

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Business

Stanton

12 July, 13:11

Sam is comparing the costs of two loans. The principal amount of each loan is $5,000. One is due in one year and the other is due in four years. Both have the same stated rate of annual interest. Which of the following is true

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Answers (2)

Know the Answer?

Yair Huynh · Answer 1

the interest charges for the one-year loan will be lower than the interest charges for the four-year loan

Matthew Simpson · Answer 2

The interest charges for the one-year loan will be lower than the interest charges for the four-year loan

Explanation:

Given two different with the same principal amount and the same interest rate, you will always pay less interests for the shorter loan. This is true for every loan simply because you are paying back the money in less time and interest is charged on the amount of time it takes you to pay the loan.

For example, I lend you $100 at 12%. Since it is a small amount of money, you will pay it back in 1 month and the total payment will be $101. But if you need more time you can pay me $1 in interest for the first month and $101 at the end of the second month. If you pay me back in two months, you will have paid $2 in interest vs. $1 if you had paid me back in just one month.