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?
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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