Best loan to take question would this be correct?

R

Redmoon

New member
Joined
Mar 23, 2022
Messages
15
Question 9

A business is looking for a start-up loan of £8000. The three companies that have offered the money have the following terms, which is the best loan to take?

HelpStart: repayments spread equally over 4 years, with a simple interest rate of 5.7%
GoodLoans repayments spread equally over 4 years with an A.P.R of 5.2%
Cashgenerator: 48 equal repayments of £205.00
===================================================================
What I did was 4 years = 48 months

8000 divided by 48 means the payments are going to be 166 a month for the first 2 loan options

We are already given 205 a month for the third option

So then I increased the first initial loan by 5.7% to get 8456

the second by 5.2% to get 8416

And lastly 205 times 48 which gives us 9840

So my final answer would be the second loan option because it is the lowest amount = 8416

Would this be correct or have I went wrong somewhere thanks for any help guys. Really appreciate it.
 
Redmoon said:
A business is looking for a start-up loan of £8000. The three companies that have offered the money have the following terms, which is the best loan to take?

HelpStart: repayments spread equally over 4 years, with a simple interest rate of 5.7%
GoodLoans repayments spread equally over 4 years with an A.P.R of 5.2%
Cashgenerator: 48 equal repayments of £205.00
Click to expand...
The phrase "spread equally over 4 years" is ambiguous. It can be 4 equal annual payments or 48 monthly payments, or daily, etc...
Either way, your calculation of the payments did not take interest into account. At different interest rates, the repayments are not the same for options 1 and 2.
To choose which loan is the cheapest, I would look at the Present Value of each loan.
 
So then I increased the first initial loan by 5.7% to get 8456. Why is the interest that you are paying 5.7% of £8000? You pay every year 5.7% of what you owe. For the 1st year the interest you owe is 5.7% of £8000. But you pay more than just interest. Then the loan is less for the 2nd year. So you pay 5.7% of the money you borrowed for the 2nd year. ...and so on. I am assuming that you make one payment per year.
 
Steven G said:
So then I increased the first initial loan by 5.7% to get 8456. Why is the interest that you are paying 5.7% of £8000? You pay every year 5.7% of what you owe. For the 1st year the interest you owe is 5.7% of £8000. But you pay more than just interest. Then the loan is less for the 2nd year. So you pay 5.7% of the money you borrowed for the 2nd year. ...and so on. I am assuming that you make one payment per year.
Click to expand...
Would I be any closer if my answers are now 9985 ish 9840 ish 9798 ish Or am I still going wrong somewhere thanks
 
Instead of completely coding how you get your results can you tell us what you did? It is unfair to expect a helper here to try to figure out how you got these new results.
 
Steven G said:
Instead of completely coding how you get your results can you tell us what you did? It is unfair to expect a helper here to try to figure out how you got these new results.
Click to expand...
Sure Sorry.

What I did was increase the 8000 by 5.7% for each of the 4 years. That = 9985.96

Same for the second one I increased it by 5.2 each year. That equals= 9798.34

And with the last one I x the 205 by 48 so 9840

So 9798 would be the best loan to take?

This any closer or am I still going wrong somewhere? Thanks
 
You are missing the point I tried to make. I will try again.
Suppose you borrow £10,000 for 4 years at some interest rate AND you only make one payment per year at the end of the year.
So for the 1st year you borrowed £10,000 for the whole year and you owe interest on £10,000. At the end of the 1st year you pay the interest and say an additional £5,000.

Now it like you have a whole new loan for the 2nd year. It is as if you borrowed £5,000. At the end of the 2nd year you pay the interest (which will be less, since the interest is on a smaller amount) plus say an addition £3,000.

Now for the 3rd year it is as if you borrowed £2,000. At the end .....

Every year you DO NOT pay the same interest since your principle is getting lower.
 
You must log in or register to reply here.
Top