Question

Dean takes his boat out fishing every weekend. His current boat is still in okay condition, but he decides he’d like to buy a new one. He finds the boat of his dreams for $20,950. He does some research and finds that his credit union will give him a 5-year loan with an APR of 4.25% if he makes a down payment of 18%.

1. What is the amount of Dean’s down-payment?   

2. What is the loan amount that Dean will be financing?

3. What will his monthly payments be on the loan?

4. What is the total amount Dean will pay for his boat if he finances the purchase?

5. How much interest will Dean pay the credit union over the life of the loan?   

Sam, Dean’s younger brother, tries to convince Dean to save up for a new boat instead of getting a loan. He tells Dean that the credit union has a savings account option that offers an APR of 1.2% compounded monthly, so long as the account maintains a minimum balance of $2000.

6. Since Dean has the down payment amount already, if he uses that to start a savings account with the credit union, then adds $200 to the account each month, how much will he have at the end of 5 years?

7. If Dean starts the savings account with his down payment money, how much would he have to deposit each month for 5 years to end up with the $20,950 he needs for the boat of his dreams?

                                                                                                                                                                       

8. If Dean follows the savings plan from problem 7, how much total will he have deposited into the savings account at the end of the 5 years?

9. If Dean follows the savings plan from problem 7, how much interest will he have earned in the savings account over the course of the 5 years?

      

10. Compare the total Dean would pay on the loan to the total Dean would deposit into the savings account. How much would Dean save by going with the savings option?

11. If Dean decides he wants to save up for the boat as fast as possible, how long would it take the account to reach the full value of $20,950 if he uses the down payment money to start the account then adds $400 each month? Give the answer as years with 2 decimal places!

Answer 1