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Credit - Head Matters


2. Compare the Sources of Consumer Credit

When you use credit, you are in a sense buying a product. What product you buy can greatly affect your ability to maintain your financial health because different products have widely different costs. Now, we want to explore some means of comparing such products.

a. Describe the Consumer Advantages and Disadvantages of a Short-Period Loan versus a Long-Period Loan.

The length of a loan can significantly change the amount you owe each month and the total amount you pay. The loan length also affects the interest rate—normally a shorter period is lower interest rate; although your monthly payments are higher, your total interest charges are less. The following table shows the cash price of an item and the credit costs.

Item Cash Price Monthly Cost Total Cost
Home mortgage, $200,000 7.5% APR, 30 Years $200,000 $1,398 $503,434
Home mortgage, $200,000 7% APR, 15 Years $200,000 $1,798 $323,578

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