The difference in payments between a 7% interest rate and an 11% interest rate for a car loan of $20,000 over 5 years can be calculated using the car loan calculator. For a 7% interest rate, the monthly payment would be approximately $396. For an 11% interest rate, the monthly payment would be approximately $438. Therefore, the difference in payments is approximately $42.
For the mortgage calculator, when entering a house worth $200,000 at an 8% interest rate for 30 years, the monthly payment would be approximately $1,468. The total amount of interest paid over the life of the loan would be approximately $365,348.
When changing the interest rate to 5% while keeping the same terms, the new monthly payment would be approximately $1,073. The total interest paid over the life of the loan would be approximately $223,311.
Changing the years to 15 while keeping a 5% interest rate, the new monthly payment would be approximately $1,581. The total interest paid over the life of the loan would be approximately $86,552.
The difference in interest paid between question 5 and question 6 is approximately $136,759.
When analyzing the calculations from the mortgage calculator, it becomes clear how significant the interest rate is in determining the total cost of a loan. Higher interest rates can significantly increase the amount of interest paid over the life of the loan, as seen in the difference between the 8% and 5% interest rates. Additionally, the duration of the loan also influences the total interest paid, as shown when comparing the 30-year and 15-year terms.
To make the cost of using credit less expensive, both consumers and business owners can take several steps. Firstly, they can work on improving their credit scores, as better credit scores often lead to lower interest rates. Secondly, they can shop around and compare loan offers from different lenders to ensure they are getting the best possible terms. Additionally, making larger down payments and paying off loans early can also result in reducing the total interest paid. Lastly, maintaining a good financial track record, such as paying bills on time and managing debt responsibly, can also improve creditworthiness and potentially lead to more favorable loan terms. These strategies can help minimize the cost of using credit and ensure more financially savvy decisions.
It is now time to complete the Credits and Loans discussion. Find out the cost of a loan.
Use the Car Loan Calculator to do the following: (Click HERE for a calculator)
1. The car you would like cost $20,000. Enter $20,000 in the Auto Loan amount field.
2. Use a 7% interest rate for 5 years. Now, try an 11% interest rate for 5 years. What is the difference in payments?
Now, use a Mortgage Calculator to do the following: (Click HERE for a calculator)
3. Find out your monthly payment for a house worth $200,000 at 8% interest for 30 years.
4. Find the total amount of interest being paid over the life of the loan.
How to find Total Amount of Interest Paid: Scroll down a little and click on the button "Show/ Recalculate Amortization Table", scroll down a little more to find "Total Interest", scroll all the way down to the bottom to see the "Total amount of interest" paid.
5. Change the interest rate to 5%. What is the new payment? What is the total interest paid?
6. Change the years to 15 and keep 5%. What are the payment and total interest paid?
7. What is the difference in interest paid from questions 5 and 6?
Understanding consumer and business loans is very important. Take a look at the information above. Were you a little shocked when you saw the real cost of a loan--the interest.
In the home mortgage example, the interest paid back over the life of the loan was over 160% of the amount borrowed!!! And, that is only at 8% interest. Take a minute and play with taking out a loan of $200,000 and change the interest rate. Try one higher than 8% and see how the interest paid over the life of the loan changes. As stated before, it can be shocking!
Discuss interest rates with your class and what important lessons (for consumers and business owners) are in the activity above. What can consumers and business owners do to make the cost of using credit less expensive? Use facts and figures from the mortgage calculator to justify your answers. Make sure you reply to 2 classmates.
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