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Would it be better to have a loan with 5% interest payback in 2 years, or a loan with 2% interest paid back in five years? Explain. Show work to justify your answer.

Respuesta :

Step-by-step explanation:

If the interest on the loan is simple interest. Both the situation will have equal amount of interest ( 5*2 =10% of total amount). Therefore, it would be better to pay back with 2% interest paid back in five years. However, if the interest is compounded annually, 5% in 2 years will have lesser interest than 2% in 5 years. Hence, Former option would be better.