Aldo wants to borrow $12,000 from the bank and is choosing among two possible lo

Question

Aldo wants to borrow $12,000 from the bank and is choosing among two possible loans. The interest rate on both loans is 1.4 percent per month. Loan A would require him to make 60 equal monthly payments, with the first payment made to the bank in 1 month. Loan B would also require him to make equal monthly payments to the bank. However, 1) the monthly payment associated with loan B would be $30 less than the monthly payment associated with loan A, and 2) the first monthly payment for loan B would be made to the bank later today. How many monthly payments to the bank must be made with loan B? Round your answer to 2 decimal places (for example, 2.89, 14.70, or 6.00).

Explanation / Answer

Answer:

Loan A:

Principal = $12,000

Period = 60 months

Monthly payment made at the end of the month

Interest rate per month = 1.4%

Using PMT function of excel:

PMT (rate, nper, pv, fv, type)

PMT (1.4%, 60, -12000, 0,0)

=$296.94

Hence Monthly payment for Loan A = $296.94

Loan B:

Monthly payment associated with loan B would be $30 less than the monthly payment associated with loan A.

Hence, monthly payment of Loan B = $296.94 - $30 = $266.94

Further, monthly payments have to be made at start of the month.

Using NPER function of excel:

NPER (rate, PMT, pv, fv, type)

NPER (1.4%, 266.94, -12000, 0, 1)

= 69.72

Hence, number of monthly payments required to be made with Loan B = 69.72  

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