Question

question 6 of 8
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?
select a response.
○ it has a lower total cost.
○ it has a smaller monthly payment.
○ it has a lower interest rate.
○ it has a higher loan amount.

Explanation:

To determine why Aisha would pick the 3 - year loan, we analyze each option:

• Option "It has a smaller monthly payment": A shorter - term loan (3 - year) usually has a larger monthly payment than a longer - term loan (5 - year) for the same principal amount, so this is incorrect.
• Option "It has a lower interest rate": The 3 - year loan has an 8% interest rate and the 5 - year has 6%, so the 3 - year has a higher interest rate, this is incorrect.
• Option "It has a higher loan amount": There is no information suggesting the 3 - year loan has a higher loan amount, and the focus is on interest costs, so this is incorrect.
• Option "It has a lower total cost": Total interest cost is calculated as $I = P\times r\times t$ (where $P$ is principal, $r$ is interest rate, $t$ is time in years). Even though the 3 - year loan has a higher interest rate (8% vs 6% for 5 - year), the time period is much shorter (3 years vs 5 years). For example, if we assume a principal amount $P$, the total interest for the 3 - year loan is $P\times0.08\times3 = 0.24P$, and for the 5 - year loan is $P\times0.06\times5=0.3P$. Since $0.24P<0.3P$, the total cost (principal + interest) for the 3 - year loan would be lower (assuming the same principal) because the total interest is lower.

Answer:

It has a lower total cost.