Rico needs approximately $2,800 to buy a new computer. A two-year unsecured loan

Question

Rico needs approximately $2,800 to buy a new computer. A two-year unsecured loan through the credit union is available for 12.75 percent interest. The current rate on his revolving home equity line is 9.50 percent, although he is reluctant to use it. Rico is in the 15 percent federal tax bracket and the 5.75 percent state tax bracket. Which loan should he choose? Why? Regardless of the loan chosen, Rico wants to pay off the loan in 24 months. Calculate the monthly payments for him, assuming both loans use the simple interest calculation method.

Question 2- The payment on the credit union loan would be ?$ (Round to the nearest cent.)

Monthly Installment Loan Tables ($1,000 loan with interest payments compounded monthly) i 6 12 18 24 30 36 48 60 72 84               96 12.75% 172.92 89.2 61.33 47.42 39.1 33.57 26.7 22.63 19.94 18.06 16.67 5.75% 169.47 85.95 58.12 44.21 35.87 30.31 23.37 19.22 16.46 14.49 13.02 15.00% 174.03 90.26 62.38 48.49 40.18 34.67 27.83 23.79 21.15 19.3 17.95

Explanation / Answer

The payment on the credit union loan would be ?

Interest rate on credit union loan =12.75%, we can see that the monthly installment in the 24 month column is 47.42 pe $1000 of the loan.

So the payment on the credit union loan would be =47.42 x (2800/1000) = $ 132.776

Which loan should he choose? Why?

Total combined federal and state tax rate = (15%+5.75%) = 20.75%

Before tax cost of the home equity loan = 9.50%

The after-tax cost of the home equity loan (considering the tax savings on both federal and state taxes) would be = 9.50 % x (1-.2075) = 7.53 %

we see that the interest rate on the home equity loan = 9.50%, which is less than the credit union loan , for which the payment will be less and after tax rebate on the interest part of the payment it will be even more cheaper option.

the term of the loan is also short, so it is advisable to avail the the home equity loan.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.