You are considering the purchase of new car. You have negotiated with the salesp

Question

You are considering the purchase of new car. You have negotiated with the salesperson at the dealership and you can purchase the vehicle for $30,000. You have $8,000 that you can use as a down payment.

Prior to going into the dealership, you have set an absolute limit of $375 for the amount of monthly payments that you can make on the car. You are willing to finance over five years but you cannot exceed the payment of $375 per month. The dealer is willing to offer you financing at an annual rate of 6.5% for a 5-year loan. The dealer is willing to offer 5.5% financing on a 4-year loan.

Bankrate Website's loan calculator lets you specify any single item to calculate if the other four variables are specified. The value should be entered as whole numbers without commas.

1. Can you meet your payment restriction and finance the amount required for the car?

2. What is the maximum amount that you can borrow to meet your payment restriction if the loan is to be paid off in 5 years?

3. Suppose that you are limited to paying $375 per month but you want to pay the loan off in 4 years and not 5 years. What is the maximum amount that you can borrow?

Explanation / Answer

EMI formula is derived as follows

1) With the present situation, the payment restriction cannot be met as the monthly payments is $430 considering the downpayment of $8,000 and financing of 6.5% for 60 months EMI schedule.

2) Maximum amount that can be borrowed is $19,500 considering 5 year (60 months payment schedule) at 6.5% rate.

3) Maximum amount that can be borrowed considering 6.5% interest rate for 48 months will be $15,800.

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