aisha needs a loan to finance her latest startup. she wants a loan with the lowest overall interest costs…

aisha needs a loan to finance her latest startup. she wants a loan with the lowest overall interest costs. shes considering a 3-year loan with an 8% fixed interest rate or a 5-year loan with a 6% fixed interest rate. why would aisha pick the 3-year loan?\n\nselect a response.\n- it has a lower total cost.\n- it has a smaller monthly payment.\n- it has a lower interest rate.\n- it has a higher loan amount.

aisha needs a loan to finance her latest startup. she wants a loan with the lowest overall interest costs. shes considering a 3-year loan with an 8% fixed interest rate or a 5-year loan with a 6% fixed interest rate. why would aisha pick the 3-year loan?\n\nselect a response.\n- it has a lower total cost.\n- it has a smaller monthly payment.\n- it has a lower interest rate.\n- it has a higher loan amount.

Answer

Explanation:

Step1: Define total interest cost variables

Let $P$ be the principal loan amount. Total interest is roughly proportional to the product of the rate $r$ and time $t$.

Step2: Estimate cost for 3-year loan

$$Cost_1 \approx P \times 0.08 \times 3 = 0.24P$$

Step3: Estimate cost for 5-year loan

$$Cost_2 \approx P \times 0.06 \times 5 = 0.30P$$

Step4: Compare the total costs

Since $0.24P < 0.30P$, the 3-year loan results in lower overall interest expenses despite the higher annual rate.

Answer:

It has a lower total cost.