Question

Jenna is considering paying off her current credit card bill with a 2-year loan from her bank. She has stopped using the card and is paying $100 per month that will pay off the total balance in 2 years. The bank charges an upfront $500 fee to make the loan but will lower her monthly payment to $50 per month.

Jenna is evaluating the loan using the payback period method with a 1-year payback period as the goal. Should she take the loan? Why?

Group of answer choices

No, the $500 fee is too much compared to the savings of $50 per month.

No, the savings is not significant enough to make it beneficial to Jenna under the payback period.

Yes, the $50 savings is significant enough to make it beneficial to Jenna under the payback period.

It is not possible to answer as the interest rates of the credit card and the bank loan are needed to determine if the bank loan will be beneficial to Jenna.

Answer 1

For the loan:

Upfront cash outflow= $500

Cash inflow per month = Saving made due to the loan = $100 - $50 = $50

Payback period = $500/$50 = 10 months

Since the payback period is less than 1 year, Jenna should take the loan. Option C.