Question

You are considering two ways of financing a spring break vacation. you could put it on your credit​ card, at 17 % ​apr, compounded​ monthly, or borrow the money from your​ parents, who want an interest payment of 9 % every six months. which is the lower​ rate?

Answer 1

Credit card has slightly lower interest rate. Let's take a look at both interest rates for 1 year and see what costs more. First, the credit card at 17% apr compounded monthly. Each month, 17%/12 interest will be taken. The total interest over the year will be (1 + 0.17/12)^12 = 1.183891728 times the original debt. Now let's look at the loan from the parents. Over 1 year, you'll be accumulating 2 interest payments. The formula for the year will be (1 + 0.09)^2 = 1.1881 Comparing the overall rate between the credit card and the parents, the credit card is slightly lower than the parents.