Question

The longer a loan schedule​ lasts, the more interest you will pay. For a $20,000-car-loan at 6​% APR​ (compounded monthly) for three years (36 monthly​ payments), how much will it incur in total​ interest? For the same loan​ amount, how much will it incur in total interest if the loan rate is over six years (72 payments)?

a. Find the difference in total interest. (answers: 1888- 3904- 2016)

b. Why would you be willing to pay this extra​ interest?

Answer 1

Annual percentage rate is given 6% but it is not equal to interst rate.Annual percentage rate is always higher becuase it contain other exeppenses other than interest like other feeses.Annual percentage rate is the sum of monthly payment till the year end ie the amount we have to spent in an year.

For 6% annual percentage rate,we have to pay 6%*20000=1200

For three years we have to pay 3600

When the schedule extended to 6 years then payable amount become=1200*6=7200

So the difference =3600

3600 extraa payable as compared to 3 year loan.interest rate is less than annual percentage rate as it include other fees,so the interst payble difference is little less to the amount payable

b.we are willing to take loan because we get more time to repay our amount and also we can use the car without having the full amount to buy a car.It is usefuul for monthly salary people and others who got their money every month.