Question

You purchased a car. The car dealership allows you to defer payments for 12 months, and...

You purchased a car. The car dealership allows you to defer payments for 12 months, and you make 48 end-of month payments thereafter. If the original loan is for $28,000 and interest in 8% per year on the unpaid balance
* What will your payment be?
* What is the effective rate of interest?

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Homework Answers

Answer #1

Loan amount after 12 months = loan amount today * (1 + (r/12))12

Loan amount after 12 months = $28,000 * (1 + (8%/12))12

Loan amount after 12 months = $30,323.99

Monthly loan payment is calculated using PMT function in Excel :

rate = 8% / 12   (converting annual rate into monthly rate)

nper = 48 (48 month loan)

pv = 30323.99 (loan amount)

PMT is calculated to be $740.30

Effective rate of interest is calculated using RATE function in Excel :

nper = 48

pmt = -740.30

pv = 28000

The RATE calculated is the monthly rate. To get annual rate, we multiply by 12.

Effective rate of interest is 12.21%

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