You decide you want to do some work on your house The contra

You decide you want to do some work on your house. The contractor says that the job will cost about $2500. You can cither go to the crcdit union and take out a home equity loan at 3.5% that is compounded monthly but you will have to borrow at least $5000. Or you can charge the exact amount on your Visa card at 13.5% compounded daily. If you don\'t make any payments on the borrowed amount for one year what would he the interest accrued for each financing option? Which is the better deal?

Solution

Two options are :i) loan at 3.5% compounded monthly but will have to borrow $5500

Amount = 5500( 1+ 0.035/12)^12*1 = $5695.62

Interest accumulated =$5695.62 - $5500 = $ 195.62

ii) Credit card loan compounded daily at 13.5% rate

Amount = 2500( 1+ 0.135/365)^365*1 = $2861.27

Interest accumulated = $ 361.27

We cam see in option 1 interest inccurred is less than in option 2

So, it better to take loan from credit union.