Question

Jaime needs to buy a new refrigerator for his apartment. He found what he needed for
$1,300 at a well-known appliance store. The store is offering two options for Jaime to
finance the appliance:
Option: A store credit card with a $1,500 limit:
1) The credit card charges 16.5% annual interest rate
2) The minimum monthly payment is $100 plus the monthly
finance charge
3) No down payment required
4) The loan is expected to be paid off in 12 months to avoid
additional penalties
Option II: The appliance store offers an installment loan for his purchase:
Loan charges a simple interest rate of 12,5%
2) Loan must be paid off in 12 equal payments to avoid penalties
A $300 down payment is required
A Which Option should Jaime choose if he wants the interest he pays to be as
small as possible?

Answer 1

The second option should be chosen as it depicts the amount with the lowest interest.

How to calculate the interest

For option 1, the annual interest will be:

= $1300 × 16.5% = $214.50

The monthly finance charge will be:

= $1300 × (0.165/12)

= $17.88

The minimum monthly payment for the first month will be:

= $100 + $17.88 = $117.88

Hence, the total amount paid will be:

= ($117.88 × 12) + $214.50

= $1629.06

For option 2, the simple interest will be:

= (1300 × 12.5%)

= $162.50

The amount that will be paid monthly will be:

= $1000/12

= $83.33.

In this case, the total amount paid will be:

= $162.50 + $1300

= $1462.50

Therefore, the second option is better as it's cheaper.

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