Which type of borrowing option would most likely result in the borrower paying the highest amount of interest?A.A card with a high compound interest rateB.A card with a low compound interest rateC.A card with a low simple interest rateD.A card with a high simple interest rate
Question
Which type of borrowing option would most likely result in the borrower paying the highest amount of interest?A.A card with a high compound interest rateB.A card with a low compound interest rateC.A card with a low simple interest rateD.A card with a high simple interest rate
Solution
The borrowing option that would most likely result in the borrower paying the highest amount of interest would be A. A card with a high compound interest rate.
Here's why:
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Compound interest is interest on the initial principal and the accumulated interest of previous periods. It can be thought of as “interest on interest," and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.
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The higher the interest rate, the more interest you will have to pay. So a high compound interest rate would accumulate more interest than a low compound interest rate, a low simple interest rate, or a high simple interest rate.
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Therefore, a card with a high compound interest rate would most likely result in the borrower paying the highest amount of interest.
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