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A person needs a small, short-term loan to cover an unexpected expense until their next paycheck. They have identified several potential lenders, each with different fees and repayment periods. Arrange the following steps in the most logical order to determine the most cost-effective borrowing option.
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Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Calculating the Annual Percentage Rate (APR) of a Loan
Choosing a Cost-Effective Short-Term Loan
A consumer needs to borrow $200 and is comparing two short-term loan options:
- Loan X: A 14-day loan with a $30 finance charge.
- Loan Y: A 30-day loan with a $45 finance charge.
Which statement best explains the critical factor needed to accurately compare the true cost of these two loans?
A consumer needs to borrow $500. They are comparing two options: Loan X requires a $60 fee for a 15-day loan, while Loan Y requires a $75 fee for a 30-day loan. The consumer concludes that Loan X is the better choice solely because the dollar amount of the fee is lower. This conclusion is financially sound.
Evaluating Short-Term Loan Costs
To accurately compare the cost of different short-term loans, one must consider the finance charge, the amount borrowed, and the loan duration. Analyze the four loan offers below and match each one to the description that best characterizes its relative cost.
A consumer wants to compare the true cost of several short-term loans that have different fees and repayment periods. To do this, they must calculate a standardized annual rate for each loan. Arrange the following steps into the correct sequence for calculating this rate.
Evaluating a Financial Decision
A consumer is comparing a $250 loan for 14 days with a $40 fee against a $300 loan for 30 days with a $65 fee. To accurately compare the true cost of borrowing for each option, the different fees and time periods must be converted to a single, standardized metric known as the __________, which expresses the cost as a yearly rate.
A consumer is comparing two short-term loan options to borrow $400:
- Loan A: A 10-day loan with a $40 finance charge.
- Loan B: A 30-day loan with a $60 finance charge.
The consumer calculates that Loan A costs $4 per day ($40 / 10 days) while Loan B costs $2 per day ($60 / 30 days), and concludes Loan B is the more cost-effective option. Why is this 'cost per day' analysis a potentially misleading way to determine the true cost of borrowing?
Evaluating a Short-Term Borrowing Decision
Evaluating Short-Term Loan Options
Evaluating Short-Term Borrowing Strategies
A person needs to borrow $500 for one month to cover an emergency car repair. They are considering two options: 1) A payday loan that charges a flat fee of $75 for the month. 2) A cash advance from their credit card, which has an Annual Percentage Rate (APR) of 24%. To determine the most cost-effective option, which of the following is the most important initial step?
When comparing two short-term loans of the same principal amount, the loan with the lower dollar finance charge will always have the lower Annual Percentage Rate (APR).
Analyzing Short-Term Loan Costs
A person is comparing two short-term loan offers. Option A is a $500 loan for 30 days with a $60 finance charge. Option B is a $1000 loan for 60 days with a $100 finance charge. Which statement provides the most accurate analysis for determining the more cost-effective loan?
A person needs a small, short-term loan to cover an unexpected expense until their next paycheck. They have identified several potential lenders, each with different fees and repayment periods. Arrange the following steps in the most logical order to determine the most cost-effective borrowing option.
A consumer is comparing two short-term loan options. Option X offers a $400 loan for 14 days with a $45 finance charge. Option Y offers a $400 loan for 30 days with a $75 finance charge. Which statement represents the most accurate evaluation of these two options?
A person is evaluating several short-term loan options to cover an unexpected expense. To make an informed decision, they must understand the key components of each loan. Match each loan component with its correct description or role in the comparison process.
A person needs to borrow $500. They are comparing two short-term loan options. Option A is a loan for 15 days with a $40 finance charge. Option B is a loan for 30 days with a $70 finance charge. The person concludes that Option A is the more cost-effective choice because its finance charge ($40) is lower than Option B's ($70). What is the primary flaw in this reasoning?