Compare the monthly payments and total loan costs for the following pairs of loan options. Assume that both loans are fixed rate and have the same closing costs. Discuss the pros and cons of each loan.

You need a $60,000\$ 60,000 loan.

\quad Option 11: a 3030-year loan at an APR\mathrm{APR} of 7.15%7.15 \%

\quad Option 22: a 1515-year loan at 6.75%6.75\%


Answered 1 year ago
Answered 1 year ago
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The monthly payment can be calculated using the formula

PMT=P×(APRn)[1(1+APRn)(nY)]\text{PMT} = \dfrac{P \times \left( \dfrac{\text{APR}}{n} \right)}{\left[ 1 - \left(1 + \dfrac{\text{APR}}{n} \right)^{(-nY)} \right] }

where PMT\text{PMT} is the regular payment amount, APR\text{APR} is the annual percentage rate in decimal form, PP is the amount borrowed, nn is the number of payment periods per year, and YY is the loan term in years.

On the other hand, the total amount paid over the term, can be computed using the formula below.

total amount paid=PMT×loan term in months\text{total amount paid} = \text{PMT} \times \text{loan term in months}

where PMT\text{PMT} is the regular payment amount and the loan term in months can be calculated by multiplying the loan term in years to 1212.

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