Question

To buy a fancy sports car, you need to borrow $300,000 from a bank. The bank will lend you the money for 5 years at an interest of 12% per year. What will be your monthly payment to the bank?

Answer 1

The monthly payment is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 12% / 12 (Since there are monthly payments, hence divided by 12)

= 1% or 0.01

n is computed as follows:

= 5 x 12 (Since there are monthly payments, hence multiplied by 12)

= 60

So, the monthly payments will be computed as follows:

$ 300,000 = Monthly payment x [ (1 - 1 / (1 + 0.01)⁶⁰ ) / 0.01 ]

$ 300,000 = Monthly payment x 44.95503841

Monthly payment = $ 300,000 / 44.95503841

Monthly payment = $ 6,673.33 Approximately