Question

You can afford a $300 per month car payment. You've found a 5 year loan at 7% interest. How big of a loan can you afford?

Answer 1

Given that we can afford only $ 300 per month on the loan. This means that per month installment of the loan is $ 300.

Duration of the loan = 5 Years

Now no. of total installments = 5 years x 12 Months = 60 Installments

Interest Rate (R)= 7%

Now Equated Monthly Installments = Prinicpal x R + (1+R)^n/ (1+R)^n-1

Therefore we have

500 = Principal x 0.07 + (1.07)^60/(1.07^60 -1)

500 = Principal x 0.07 x 1.01756

Prinicpal = $ 7019.59

Therefore I can draw a loan of $ 7019.59 for pruchasing the car.