Question

Loans - You need a new car and have decided to buy a Toyota Tundra. Fortunately, you have a great credit rating and you have your choice of financing. The cost is $26,000 out of the door. You have $3,000 to put down for a down payment. You have two finance options and need to decide which one is the best.

Option 1 - You can choose 0% financing for 60 months. The loan amount is $23,000.

a. What is your monthly payment? (Hint: divide the loan amount by 60)

b. What is the total amount you will pay for the car? (Hint: Don't think too hard... it is just the amount of the loan.)

Option 2 - You can choose $2,000 cash back, instead of 0% financing from the dealer, and decide to receive financing from your local bank. You will need to borrow $21,000 at an interest rate of 2.75% for 60 months.

c. Create an amortization table and past the first 5-6 lines in your word document.

d. What is your monthly payment?

e. What is the total amount you will pay for the car? (Add the payment column.) (.5 points)

f. Which option is better? (.5 points)

Answer 1

Solution:

OPTION 1:

1. Monthly payment for 0% loan = 23000/60 = 383.33

2. Total Amount = 383.33*60 = $23,000

OPTION 2:

c.

Formula
Monthly Payments = Loan Amount / [1-1/(1+i)^n]/i
1+i	1.0023
(1+i)^n	1.1472
1/(1+i)^n	0.8717
1-1/(1+i)^n	0.1283
[1-1/(1+i)^n / i]	55.9979
Monthly Payments	$375.01

	Monthly Payments	Principal	Interest	Balance
0				21000
1	$375.01	$326.89	$48.13	$20,673.11
2	$375.01	$327.64	$47.38	$20,345.47
3	$375.01	$328.39	$46.63	$20,017.08
4	$375.01	$329.14	$45.87	$19,687.94
5	$375.01	$329.90	$45.12	$19,358.05
6	$375.01	$330.65	$44.36	$19,027.39
7	$375.01	$331.41	$43.60	$18,695.99
8	$375.01	$332.17	$42.84	$18,363.82
9	$375.01	$332.93	$42.08	$18,030.89
10	$375.01	$333.69	$41.32	$17,697.19
11	$375.01	$334.46	$40.56	$17,362.73
12	$375.01	$335.22	$39.79	$17,027.51

d. Monhlty Payment = $375.01

e. Total Amount paid = $375.01*60 = $22500.84

f. Option B is better as we end up paying lesser monthly payments. The total amount paid is also lesser by $500.