Which Loan Payment Option Saves More? Calculate Now!

Maya’s tech startup, TechSpark, is gaining traction, but running a business means managing multiple financial obligations. To finance a new marketing campaign and hire additional developers, Maya takes a sizable loan from Innovate Bank. However, as she juggles her growing expenses, she must also decide whether to pay off the loan in full or reinvest some of the funds to drive further growth. With interest compounding annually, Maya wonders about the true cost of her borrowing.

Word Problem

Maya takes a loan of $50,000 at an annual interest rate of 8% for 5 years. The loan terms include two payment options:

  1. Pay the full amount (principal + interest) at the end of 5 years.
  2. Pay $20,000 after 2 years and the remaining balance (with interest) at the end of 5 years.

Calculate the total repayment amount under both options:

  • In Option 1, the interest is compounded annually for the entire loan duration.
  • In Option 2, the first $20,000 repayment stops accruing interest after 2 years, while the remaining balance continues to compound for the full 5 years.
Question: What is the total repayment amount under each option, and which option is more cost-effective for Maya?

Options:
A) Option 1: \$73,465, Option 2: \$67,407
B) Option 1: \$70,000, Option 2: \$65,340
C) Option 1: \$75,500, Option 2: \$69,000
D) Option 1: \$72,000, Option 2: \$66,432

Explore more problems on this topic at Simple and Compound Interest or sign up on LearnTheta’s AI-Powered Practice Platform. 

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