SAT High School

Use the following chart to explain how the amount of principal affects the total cost of the loan.
Principal
Loan Repayment Period
Interest Rate
$5,000
6.47 percent
Monthly Payment
$98
Loan Repayment Period
five years
Total cost of the loan $5,866
Loan 1
Loan 2
$6,000
6.47 percent
$117
five years
$7,039

Answers

Answer 1

With a higher principal, Loan 2 incurs more interest charges over the repayment period, which contributes to the higher total cost of $7,039 compared to Loan 1's total cost of $5,866.

How to explain the information

In Loan 1, the principal is $5,000, and the total cost of the loan is $5,866. This means that by the end of the repayment period, the borrower will have paid a total of $5,866, which includes both the principal and the accrued interest.

Similarly, in Loan 2, the principal is $6,000, and the total cost of the loan is $7,039. This means that by the end of the repayment period, the borrower will have paid a total of $7,039, including both the principal and the accrued interest.

By comparing the two loans, we can observe that increasing the principal amount from $5,000 to $6,000 results in a higher total cost of the loan. The difference in principal directly affects the monthly payment amount. In Loan 1, the borrower pays $98 per month, while in Loan 2, the monthly payment increases to $117.

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