3. A person borrowed $7000 from a bank, for 4 years at the interest rate of 6% p

Question

3. A person borrowed $7000 from a bank, for 4 years at the interest rate of 6% per year with equal monthly payments to purchase a car. a. How much is his monthly payment for this loan? b. How much of it goes to interest payment (illustrate it only for year 1, 2 and 3). c. How much he has to pay for total interest at the end of the loan period. WHAT IS THE EFFECTIVE INTEREST RATE/MONTH (no penalty for early payment) If the person wants to pay the whole amount of the loan at the end of 3 years, d. How much will he owe to the bank at the end of 3 years. e. How much he has to pay for total interest (no penalty for early payment). f. How much are his savings? (compared to 1st option; option a.) g. If he also has mortgage payment of 1000 moth (5 years also) @ 12% and his monthly payments can not exceed 1400. What kind payment plan you will suggest if he wants to finish at the earliest possible.

Explanation / Answer

a. Monthly payment = $164.40

b. Interest payment for year 1,2,3 = $673.25

c. Total interest at end of loan period = $890.94

Effective interest rate per month = ((1+ i/12)^12) - 1 = 6.1677812

d. At the end of 3 years pre closing the loan, he owes $1909.91 to the bank

e. Total interest on $1909.91 = $114.59

f. He will not save by preclosing the loan

g. I would suggest that he should not pre close the car loan so that his monthly payments do not exceed $1400.

See the working in excel

0.061678

6.1677812

Loan Amount $ 7,000.00 Tenure (years) 4 Tenure (Months) 48 Interest rate per year 6% Interest rate per month 0.005 0.5 EMI ($164.40) Effective interest rate per month

0.061678

6.1677812

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