5. Bank loans

Short-term financing through bank loans

Consider this case:

Chez Quis Inc. needs to take out a one-year bank loan of $500,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 8% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 5% add-on interest to be repaid in 12 equal monthly installments.

Based on a 360-day year, what will be the monthly payment for each loan for November? (Hint: Remember that November has 30 days.)

	Value
Simple interest monthly payment
Add-on interest monthly payment

Choose the answer that best evaluates the following statement:

Tolbotics Inc. needs to borrow $10,000,000. The company has been offered both simple interest and add-on interest loans. The add-on interest loan has a significantly lower interest rate than the simple interest loan.

The company needs to evaluate more factors than just the interest rate before deciding which type of loan it should accept.

The company should accept the add-on interest loan, because it will be paying less money in interest due to the lower interest rate.