Question

Christina borrowed $3,000 five years ago and pays a fixed 2 percent interest rate each period on her loan. Which one of the following results in lower total interest on her loan over the course of one year?

Having compounding periods of one month instead of one year.

Getting charged compound interest over the year instead of simple interest.

Having compounding periods of one month instead of one one week.

There can be no difference over the year if the interest rate per period is fixed. The rate must be 2% annually.

Waiting until the last minute to make her loan payments because she has a high discount rate.

Answer 1

Answer is the 2nd option "Getting charged compound interest over the year instead of simple interest"

This will reduce the total interest on her loan over the course of one year as doing this would lower the interest burden further on the reduced principle amount of loan. For example. for a loan of $3000 at 2% interest, lets assume the priciple payment is $300. In case of simple interest interest will be charged on $3000, however in case on compound interest, interest would be charged on $2,700. Hene, this ould reduce the interest burden.