You need $25,000 today and have decided to take out a loan at 7 percent interest for five years. Which one of the following loans would be the least expensive for you? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

Question

Quizplus · Accepted Answer

An amortized loan with equal principal payments would be the least expensive option because it would result in the lowest total amount of interest paid over the five-year period. The interest-only loan would result in the highest total amount of interest paid, while the amortized loan with equal loan payments and balloon loan would result in higher amounts of interest paid compared to the equal principal payments option. A discount loan is not applicable in this scenario as it typically involves buying a bond at a discount and then receiving the face value at maturity.

You Need $25,000 Today and Have Decided to Take Out