You are presented two choices to borrow funds for a significant unexpected expenditure. it will take at least three years to pay off the loan assuming you make more than the minimum payment. Which choice is the least cost alternative in terms of interest paid over the life of the loan?
A) A credit card with a variable interest rate of 4 % over the prime rate; for info, the latest forecast is for prime to stay below 5% throughout the life of your loan.
B) An interest only balloon payment loan for 3 years with 10% interest, but your monthly payments would be half of those compared to the credit card.
C) There is not enough information to make the decision.
D) Both A and B are about equal since the interest only payment aspect offsets the slightly higher interest rate on the credit card.

Question

Quizplus · Accepted Answer

The credit card option (A) with a variable interest rate of 4% over the prime rate, with the prime expected to stay below 5%, would result in a lower interest rate compared to the 10% interest rate of the balloon payment loan (B). Even with the prime rate at its maximum forecasted, the total interest rate on the credit card would be 9% (4% over a 5% prime rate), which is still lower than the 10% interest rate of the balloon payment loan.

You Are Presented Two Choices to Borrow Funds for a Significant