quiz\nquestion 5 of 8\nhow do loan terms affect the cost of credit?\nselect a response.\nlonger loan terms…

quiz\nquestion 5 of 8\nhow do loan terms affect the cost of credit?\nselect a response.\nlonger loan terms have lower monthly payments and lower interest\nshorter loan terms have higher monthly payments and lower overall interest\nloan terms are based on your pay schedule and how often you get paychecks\nloan terms only apply to loans with collateral but do not apply to those without\ncollateral

quiz\nquestion 5 of 8\nhow do loan terms affect the cost of credit?\nselect a response.\nlonger loan terms have lower monthly payments and lower interest\nshorter loan terms have higher monthly payments and lower overall interest\nloan terms are based on your pay schedule and how often you get paychecks\nloan terms only apply to loans with collateral but do not apply to those without\ncollateral

Answer

Brief Explanations:

  • For longer loan terms: The monthly payment is calculated as (M = P\times\frac{r(1 + r)^n}{(1 + r)^n- 1}) (where (P) is the principal, (r) is the monthly interest rate, (n) is the number of months). A larger (n) (longer term) makes the denominator ((1 + r)^n-1) grow at a faster rate (exponential growth) compared to the numerator (linear - like growth in terms of (n) for the numerator part (P\times r\times n) when (n) is large). So, monthly payments (M) are lower. But the total interest paid (I = M\times n - P). Since (n) is large, even with a lower (M), the total interest is higher.
  • For shorter loan terms: Using the same formula (M = P\times\frac{r(1 + r)^n}{(1 + r)^n- 1}), a smaller (n) makes the denominator ((1 + r)^n - 1) smaller, so (M) (monthly payment) is higher. And the total interest (I = M\times n - P). Since (n) is small, the total interest is lower.
  • Loan terms are not based on pay - schedule (they are based on the agreement between lender and borrower regarding the time to repay the loan). And loan terms apply to both secured (with collateral) and unsecured (without collateral) loans.

Answer:

B. Shorter loan terms have higher monthly payments and lower overall interest