Suppose you're considering taking out a car loan for $15,000. Loan #1 allows you to borrow...

Suppose you're considering taking out a car loan for $15,000. Loan #1 allows you to borrow at 8% interest for 3 years, while Loan #2 charges 6% interest for 5 years. Which will cost you less in the long run?

Solutions

Expert Solution

- Car loan = $ 15,000

Loan #1-

Interest rate= 8%

No of years of loan = 3

where, P = loan amount = $ 15,000

r = periodic interest rate = 0.08/12 = 0.00666

n = no of periods = 3yrs*12months = 36

Monthly payments = $ 470.05

Total Interest Cost over the period of loan = (No of payments*Monthly payments) - Loan Amount

= (36*$470.05) - $15000

= $ 1921.8

Loan #2-

Interest rate= 6%

No of years of loan = 5

where, P = loan amount = $ 15,000

r = periodic interest rate = 0.06/12 = 0.005

n = no of periods = 5yrs*12months = 60

Monthly payments = $ 289.99

Total Interest Cost over the period of loan = (No of payments*Monthly payments) - Loan Amount

= (60*$289.99) - $15000

= $ 2399.4

So, Loan #1 cost less in the long run as its Interest cost is less.

jeff jeffy answered 1 year ago

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