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30 June, 14:19

Which of the below individuals has the best capacity to pay back a loan?

A. Paul, a 20-year-old custodian making $25,000 annually needs a $50,000 loan to buy a new Chevrolet Silverado with a lift kit.

B. None of these.

C. Eileen, a 90-year-old living on a pension and social security (approx. $2000 monthly) would like to take a $400,000 loan to purchase a new yacht.

D. John, a 35-year-old public school teacher making $100,000 per year takes a $10,000 loan to buy a new vehicle.

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  1. 30 June, 15:14
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    D. John

    Explanation:

    John has an annual income of $100,000 which is equivalent to a monthly salary of $ 8,334.00 ($100,000 divide by 12 months)

    Applying the 28/36 borrowing rule, Mr. John cannot exceed 36 percent of his monthly income to service debts. It means that John has $ 3000 available every month to service his loans.

    John intends to take a loan of $ 10,000. This amount is within his ability to pay. Even if he has other debts, he only needs months to clear the loan plus interest.

    If we apply the same rule to Paul, his monthly salary is $2, 084.00. He has $ 750.00 available to pay the loan every month. A loan of $ 50,000 with interest will take about seven years to clear. Considering he may want to take other loans in that period and the value of the car by then, Paul is likely to default.

    Eileen will have $720 available for repayments per month and annually $ 8640.00 to repay $400,000.00; she will need about 47 years. Considering her age, it's not viable.
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