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21 May, 06:56

oy is taking out a car loan which she will pay back with interest. Which option will require her to pay the lowest amount in interest?

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  1. 21 May, 07:20
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    Annual Compounding

    Explanation:

    Compounding Interest or Compound Interest is a means of calculating interest on a loan taken using both the interest accumulated from previous periods and the principal amount taken on the loan at the initial instance.

    Compounding Interest's calculation involves the multiplication of the principal amount and the interest rate. The interest rate however unlike simple interest is raised to the number of periods involved in the compound minus one.

    Interests can be compounded daily, weekly, monthly or semi-annually, annually or depending on your agreed period.

    It is important to note that the lower the number of compounding periods then the lower the interest to be paid. For instance, a daily compounding pays more interest than a monthly one, monthly more than bi-annual and bi-annual more than annual. This is because the calculation takes into consideration all the periods involved and the higher the number of periods the higher the interest.

    So an annual compounding will mean Joy will compound less often than daily, weekly or monthly and this will guarantee the payment of the lowest interest.
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