You have reviewed your budget and determined that you can afford to pay $300 per

Question

You have reviewed your budget and determined that you can afford to pay $300 per month as a car payment. How much can you borrow if your credit is good and the interest rate is 4 percent using a 48 month loan? How much can you borrow if your credit is bad and the interest rate is 8 percent using the same loan term? In this example, if you have bad credit but the car you want requires that you borrow $13,250, how could the financing be changed to allow you to borrow more money without increasing your payment?

Explanation / Answer

when credit is good

FV = 0, rate = 4%/12 n = 48 pmt = 300

use PV function in Excel

amount to be borrowed = 13,286.65

when credit is bad, just replace rate = 8%/12

amount to be borrowed = 12,288.57

in the final case the number of months can be increased

PV = 13250 FV = 0 rate = 8/12 PMT = -300

use nper function inExcel

number of months = 52.49 months

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