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Chapter 8: Problem 33

Group members should go to the Internet and select a car that they might like to buy. Price the car and its options. Then find two loans with the best rates, but with different terms. For each loan, calculate the monthly payments and total interest.

Short Answer

Expert verified
This exercise is based on personal circumstances and hence, will result in a variety of answers depending upon the chosen car and loans. The total repayment amount for the first loan and the second loan can be calculated using above provided formulas and steps.

Step by step solution

01

Select a Car

Head over to any car dealership website or an online marketplace and choose a car that appeals to you. Ensure to note down the price of the car including any additional options that you would like.
02

Find Two Loans

Research online for available car loans, focusing on those with the best rates. Two loans should be selected that have different terms. For example, a 4-year loan and a 6-year loan. Record the details of the loans including interest rate and term (in years).
03

Calculate Monthly Payments

Given that the formula to calculate monthly payments (M) on a loan is \( M = P \times \[ \frac{r(1 + r)^n}{(1 + r)^n - 1}\] \), where P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the number of payments (months). For each loan, plug in the values and calculate the monthly payments.
04

Calculate Total Interest

The total interest paid on a loan is the difference between the total payments made and the original loan amount (principal). This is calculated as \( I = (M \times n) - P \), where M is the calculated monthly payment, n is the number of payments (months), and P is the principal loan amount. Calculate the total interest for each loan.
05

Compare Loan Options

Compare the two loans in terms of total repayment amount (total payments and total interest) and the affordability of the monthly repayment amount. This will help in making a more informed decision on which loan is more beneficial depending on personal circumstances.

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Most popular questions from this chapter

You would like to have \(\$ 4000\) in four years for a special vacation following college graduation by making deposits at the end of every six months in an annuity that pays \(7 \%\) compounded semiannually. a. How much should you deposit at the end of every six months? b. How much of the \(\$ 4000\) comes from deposits and how much comes from interest?

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Suppose that you are buying a car for \(\$ 56,000\), including taxes and license fees. You saved \(\$ 8000\) for a down payment. The dealer is offering you two incentives: Incentive \(\mathrm{A}\) is \(\$ 10,000\) off the price of the car, followed by a four-year loan at \(12.5 \%\). Incentive \(\mathrm{B}\) does not have a cash rebate, but provides free financing (no interest) over four years. What is the difference in monthly payments between the two offers? Which incentive is the better deal?
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