It is now time to complete the Credits and Loans discussion. Find out the cost of a loan.

Question

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!

Answer 1

To complete the calculations as you outlined, let's analyze the costs associated with both a car loan and a mortgage based on the provided scenarios.

Car Loan Calculations

1. Car Price: $20,000
2. Interest Rate and Loan Duration:
   • 7% Interest, 5 years:
     • Monthly Payment: You would need to use the Car Loan Calculator inputting $20,000 loan amount, 7% interest, and 5 years.
   • 11% Interest, 5 years:
     • Monthly Payment: Similarly, input $20,000 loan amount, 11% interest, and 5 years into the calculator.

Example Calculated Payments:

Assuming typical Car Loan calculations,

• At 7% for 5 years: Monthly Payment ≈ $396.02
• At 11% for 5 years: Monthly Payment ≈ $442.19
• Difference in Payments: \[ \text{Difference} = $442.19 - $396.02 ≈ $46.17 \]

Mortgage Calculations

3. House Price: $200,000
4. Interest Rate and Loan Duration:
   • 8% Interest for 30 years:
     • Monthly Payment: Enter house worth $200,000 and 8% interest for 30 years into the Mortgage Calculator.
     • Total Interest: After calculating, use the amortization table to find total interest paid over the life of the loan.

Example Calculated Payments:

• At 8% for 30 years:
  • Monthly Payment ≈ $1,466.53
  • Total Interest Paid ≈ $279,165.57 (over the life of the loan).

5. Change Interest Rate to 5%:
   • 5% for 30 years:
     • Monthly Payment: Use the same mortgage calculator for $200,000 at 5%.
     • Total Interest: Check amortization table again.

Example Calculated Payments:

• At 5% for 30 years:
  • Monthly Payment ≈ $1,073.64
  • Total Interest Paid ≈ $184,929.69.

6. Change Years to 15 and Keep 5%:
   • 5% for 15 years:
     • Monthly Payment: Again, using the mortgage calculator for $200,000 at 5% for 15 years.
     • Total Interest: Check the amortization for total interest.

Example Calculated Payments:

• At 5% for 15 years:
  • Monthly Payment ≈ $1,582.33
  • Total Interest Paid ≈ $84,052.62.

7. Difference in Interest Paid from Questions 5 and 6: \[ \text{Difference} = $184,929.69 - $84,052.62 ≈ $100,877.07 \]

Summary

• The cost of loans can be substantial due to interest rates, which increase the repayment amounts significantly over time.
• Using the example figures, you can see that at a higher interest rate, you not only pay more monthly but also a dramatically larger total in interest over the lifetime of the loan.

This calculation framework should give you a solid understanding of how to evaluate loan costs effectively! If you use exact figures from a reliable financial calculator, they will enhance the accuracy of these estimates.