Question
You need to borrow $20,000 to buy a car. You can only afford to make monthly payments of $200. The bank offers 3 choices: 3-year loan at 5%, 4-year loan at 6%, and a 5-year loan at 7%.
a) What’s the monthly payment for each loan?
b) Which loan is best for your situation?
c) What’s the total amount you would pay over the term of each loan?
a) What’s the monthly payment for each loan?
b) Which loan is best for your situation?
c) What’s the total amount you would pay over the term of each loan?
Answers
I will assume that the rates are per annum compounded monthly
Choice #1:
i = .05/12 , n = 36
P(1 - 1.0041666..^-36)/.0041666..=20000
P = 599.42 ---- can't afford that
Choice #2
i = .06/12 , n = 48
P(1 - 1.005^-48)/.005 = 20000
P = 469.70 ---- still can't afford it
choice #3
i = .07/12 = .0058333... , n = 60
P(1 - 1.0058333..^-60)/.0058333 = 20000
P = 396.02
Well , it looks like you can't afford that car.
Choice #1:
i = .05/12 , n = 36
P(1 - 1.0041666..^-36)/.0041666..=20000
P = 599.42 ---- can't afford that
Choice #2
i = .06/12 , n = 48
P(1 - 1.005^-48)/.005 = 20000
P = 469.70 ---- still can't afford it
choice #3
i = .07/12 = .0058333... , n = 60
P(1 - 1.0058333..^-60)/.0058333 = 20000
P = 396.02
Well , it looks like you can't afford that car.