Two fully amortizing fixed-rate loans have the same amount and interest rate, but one has a 15-year term and the other a 30-year term. Which statement is generally true?
Correct Answer
A) The 15-year loan has a higher monthly principal-and-interest payment but less total interest if paid as scheduled
Why this is correct: With the same loan amount and interest rate, a shorter term (15 years) requires a higher monthly payment because the principal must be repaid in fewer installments. However, because the principal is repaid faster, less interest accrues over the life of the loan, resulting in lower total scheduled interest cost. Why the other choices are wrong: "The 30-year loan always has the higher monthly payment" is wrong; the 30-year loan has a lower monthly payment due to the longer repayment period. "Both have identical payments because the rate is the same" is wrong; payment amount depends on both rate and term. "The 15-year loan cannot amortize" is wrong; a 15-year loan is fully amortizing by definition. Exam tip: Shorter term = Higher monthly payment but Lower total interest. This trade-off is key for advising borrowers.
Why This Is the Correct Answer
Why this is correct: With the same loan amount and interest rate, a shorter term (15 years) requires a higher monthly payment because the principal must be repaid in fewer installments. However, because the principal is repaid faster, less interest accrues over the life of the loan, resulting in lower total scheduled interest cost. Why the other choices are wrong: "The 30-year loan always has the higher monthly payment" is wrong; the 30-year loan has a lower monthly payment due to the longer repayment period. "Both have identical payments because the rate is the same" is wrong; payment amount depends on both rate and term. "The 15-year loan cannot amortize" is wrong; a 15-year loan is fully amortizing by definition. Exam tip: Shorter term = Higher monthly payment but Lower total interest. This trade-off is key for advising borrowers.
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