You have been offered three loans with different terms Loan

You have been offered three loans with different terms.

Loan A - 1.2% per month

Loan B - 15% nominal annual rate, compounded daily.

Loan C - 14.9% nominal annual rate, but continuously compounded.

Which one would be the most attractive to accepts?

Accept > Loan A – 1.2% per month

We should accept the loan which has low effective annual interest rate. Loan A has lowest effective annual rate.

EAR = (1+periodic rate)^compounding frequency per year - 1

Effective annual interest rate (EAR) calculation for each loan:

Loan A: EAR = (1+1.2%)^12-1 = 15.39%

Loan B: EAR = (1+15%/365)^365-1 = 16.18%

Loan C: EAR for continuous compounding = e^14.9% - 1 = 2.7182^(14.9%)-1 = 16.07%