Aisha is considering two loans: a 3-year loan at 8% and a 5-year loan at 6%. Which does she likely prefer?

• A. 5-year loan for lower payments
• B. 3-year loan for lower total cost
• C. 3-year loan for fixed payments
• D. Both loans are equally beneficial

Answer: (B)

Aisha is likely to prefer the 3-year loan at 8% for a lower total cost. This option is advantageous because, despite the higher interest rate, the shorter loan term means she will pay off the principal more quickly. Over the life of the loan, she incurs less interest overall compared to a longer-term loan, even if its interest rate is lower.

When considering the total cost of a loan, it includes both the principal and the interest paid over the life of the loan. The longer the duration of the loan, the more interest accumulates. While a 5-year loan may seem appealing due to its lower monthly payments, it results in a higher total payment when compared to the more aggressive payoff schedule of a 3-year loan, which reduces the time interest is accruing.

This analysis highlights why the 3-year loan is beneficial for those looking to minimize overall costs in the long run.