You are saving for a trip to Europe. You have an existing savings account that earns 2 percent interest and has a current balance of $4,200. You don’t want to use your current savings for the vacation, so you decide to borrow the $1,500 you need for travel expenses. You will repay the loan in exactly one year. The annual interest rate is 5 percent.
a. If you were to withdraw the $1,500 from your savings account to finance the trip, how much interest would you forgo?
b. If you borrow the $1,500, how much will you pay in interest?
c. How much does the trip cost you if you borrow rather than dip into your savings?