Question

You are trying to decide between a 48-month loan and a 60-month car loan. If the loan is for $22,000 at 6% APR, how much more per month is the monthly payment of the shorter loan?

Answer 1

First, the monthly payment of the 48 month loan is calculated.

Information provided:

Present value= -22,000

Time= 48 months

Interest rate= 6%/12= 0.50%

The monthly payment is calculated by entering the below in a financial calculator:

PV= -22,000

N= 48

I/Y= 0.50

Press the CPT key and PMT to compute the monthly payment.

The value obtained is 516.67.

Therefore, the monthly payment of the 48 month loan is $516.67.

Next, the monthly payment of the 60 month loan is calculated.

Information provided:

Present value= -22,000

Time= 48 months

Interest rate= 6%/12= 0.50%

The monthly payment is calculated by entering the below in a financial calculator:

PV= -22,000

N= 60

I/Y= 0.50

Press the CPT key and PMT to compute the monthly payment.

The value obtained is 425.32.

Therefore, the monthly payment of the 48 month loan is $425.32

Difference in monthly payment:

= $516.67 - $425.32

= $91.35.

The 48 month loan requires a monthly payment of $91.35 more.

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