Maria is going to take out a loan with a principal of $19,700. She has narrowed down her options to two banks. Bank M charges an interest rate of 7.1%, compounded monthly, and requires that the loan be paid off in five years. Bank N charges an interest rate of 7.8%, compounded monthly, and requires that the loan be paid off in four years. How would you recommend that Maria choose her loan?

From the above information, we would recommend that Maria choose her loan from Bank M if she wants a lower monthly payments and Maria choose her loan from Bank N if she wants a lower lifetime cost.

chilljain33 chilljain33 · Answer 2 · 2022-01-08T11:37:48+01:00

The correct advise for Maria would be to take her loan from the Bank N as it will give her an overall less interest payment.

The calculation for the comparison between the two loans offered by Bank M and Bank N regarding their interests rates and number of years is as given below.

The compounded annuity is calculated by using the following formula,

[tex]\rm Compounded\ Annuity= p(1+ \dfrac{r}{n})^n^t[/tex]

Putting the given values to calculate the interest for bank M we get,

[tex]\rm Compounded\ Annuity= 19700(1+ \dfrac{0.071}{12})^1^2 ^x\ ^5\\\\\\\rm Compounded\ Annuity=19700(1.00592)^6^0\\\\\\\rm Compounded\ Annuity= \$28066.38[/tex]

Now calculating for bank N we get,

[tex]\rm Compounded\ Annuity= 19700(1+ \dfrac{0.078}{12})^1^2^x\ ^4\\\\\\\rm Compounded\ Annuity= 19700(1.0065)^4^8\\\\\\\rm Compounded\ Annuity= \$26886.09[/tex]

Now comparing the total interest paid on the loan the bank N provides loan at a cheaper interest even at higher rate and less period of years.

Hence, it is advisable for Maria to choose her loan from bank N as it provides the loan at a lower interest amount.

To know more about compound interest, click the link below.

https://brainly.com/question/25857212