Question

You will put $1200 down on a car and want a 4 year loan. You could buy a new car for $15,000 (interest rate 6%) or the same model car that is 2 years old for $11,500 (interest rate 6.5%). The new car has a monthly payment of $305.31 and the used car has a monthly payment of $244.26. Explain what you would pick and why.

Answer 1

In case of new car:

Down payment = $1200

Monthly payment = $305.31

As loan duration is 4 years, so total number of loan payments = 4 x 12 = 48

Total payment = $1200 + (305.31 x 48) = $15854.88

So, interest amount payment = $15854.88 - $15000 = $854.88

Extra amount paid = 848.88 / 15000 = 5.69%

In case of used car:

Down payment = $1200

Monthly payment = $244.26

As loan duration is 4 years, so total number of loan payments = 4 x 12 = 48

Total payment = $1200 + (244.26 x 48) = $12924.48

So, interest amount payment = $12924.48 - $11500 = $1424.48

Extra amount paid = 1424.48 / 11500 = 12.39%

Considering both the situation, it is advisable to choose to buy the new car as only 5.69% is paid in extra