Question

You purchase a fully loaded Honda Accord with an MSRP of $32,000 for $27,000.

You pay the 3% tax of $810 up front and put down $5,000. The dealer offers

a simple interest installment loan with an annual rate of 5% for 3 years. The projected resale value of the car after 2 years is $17,000.

Compute the loan value and monthly loan payments. Create a monthly amortization schedule over the entire loan period. Compute total interest over the entire loan period. Compute the total cash outflow (tax, plus down payment, plus total monthly loan payments). Compute the amount you would net after selling the car at 2 years. Does the principal portion of the payment increase or decrease as the months progress? Does the interest portion of the payment increase or decrease as the months progress? Please show all calculations and complete monthly amortization schedule.

Answer 1

Loan value = purchase price - down payment
= $27,000 - $5,000 = $22,000

Let's calculate the Monthly loan payment PMT function in Excel :

rate = 5% / 12 (converting annual rate into monthly rate)

nper = 3*12 (3 year loan with 12 monthly payments each year)

pv = 22000 (loan amount)

PMT is calculated to be $659.36

Interest in a month = principal outstanding at beginning of month * 5% / 12

Principal portion of monthly payment = monthly payment minus interest portion of payment

principal outstanding at end of month = principal outstanding at beginning of month - principal portion of monthly payment

Formula:

Total interest = (monthly payment * total number of months) - loan amount

Total interest = ($659.36 * 3 * 12) - $22,000 = $1,736.95

Total cash outflow = tax + down payment + (monthly payment * total number of months)

Total cash outflow = $810 + $5,000 + ($659.36 * 3 * 12) = $29,546.95

The principal portion and the The interest portion of the payment increase and decreases as the months progress.

-------------------------------------------------------------------

Please upvote if this answers helps !

Also do Let me know in the comments, if i have missed out on any aspect of your question.