You are considering prepaying an installment loan you took out several months ago.The lender has provided you with the following information.
Remaining months to pay 10
Loan payoff $851.29
Monthly payments $95.00
Balance due in last month of the loan $95.00
Remaining interest on the loan $98.71
You believe you can earn an annual after-tax rate of rate of 16% on your investments in each of the next ten months (1.33% a month).Given the above information,you should

Question

Quizplus · Accepted Answer

To determine whether prepaying the loan will result in a gain, we need to compare the cost of the interest on the loan with the potential earnings from investing the prepaid amount.

First, let's calculate the total cost of the remaining interest and payments on the loan: 
Total cost = (10 months * $95/month) + $98.71 = $1,028.71

If you don't prepay the loan, this is the total amount you will pay over the remaining 10 months.

Now, let's calculate the savings if you do prepay the loan: 
Savings = $1,028.71 - $851.29 = $177.42

This is the total amount you will save by not making the remaining monthly payments and paying off the loan entirely.

However, we also need to consider what you could earn by investing the prepaid amount over the next 10 months. If you invest the prepaid amount and earn a 1.33% monthly return, your total earnings would be: 
Total earnings = $851.29 * (1 + 0.0133)^10 - $851.29 = $886.91

To calculate the net gain, we subtract the amount invested from the savings: 
Net gain = $886.91 - $851.29 = $35.62

Therefore, prepaying the loan would result in a net gain of about $35.62. Therefore, the best choice is A)prepay the loan; your net gain will be about $35.62.

You Are Considering Prepaying an Installment Loan You Took Out