Question

Dave is considering two loans. Loan U has a nominal interest rate of 9.97%, and Loan V has a nominal interest rate of 10.16%. If Loan U is compounded daily and Loan V is compounded quarterly, which loan will have the lower effective interest rate, and how much lower will it be?

Answer 1

If Dave takes an interest rate that is compounded daily, he is paying much more than the other loan. if you compound the 9.97% daily for 90 days we get 8.973 as compared to one charge for the interest at .1016 equating to about an 88% increase in payments.