Question

Two years ago, you purchased your first car and financed your purchase with a five-year loan

at 6.0% p.a. You were making monthly payments of $1,160 on the car loan and you have just

made your 24th monthly payment on the car today. Assuming that you have made all 24

payments on time, the current principal balance outstanding on your car loan is closest to:

a) $26,170.

b) $27,840.

c) $38,130.

d) $41,760.

Answer 1

First we will calcualte the loan amount. It will be calculated by use of financial calculator:

Time = 5 * 12 = 60

Because monthly payments are there

I = 6%/12 = 0.5% per month

PMT = 1,160

FV = 0

By using financial calculator:

PV = 60,002

Now we will draw the payment schdule on excel with time periods.

We can see 2nd column is the initial amount that has to be paid at start of each period

Interest paymemt is calculated for each period by multiplying 0.5% * Principal amount at start of the period.

After that from the payment amount interest is subtracted to arrive at principal paid

Finally to arrive at principal left we will subtract principal paid from starting principal