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 1- The after-tax cost of the home equity loan is 7.53%.

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

Q1.) After Tax Cost of Home Equity Loan =9.50 x (1-T) =9.50 x (1-0.15 -0.0575) =7.53%

Q2.) Time of Loan = 2 years or 24 months

Monthly Payment on Credit Loan =$2800/1000x47.42 =$132.776

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