Question

a) Based on original loan of $15,000, calculate the monthly repayments to be repaid over 5 years. Assume an interest rate of 25% p.a.

Andrea can afford to pay $600 per month into the loan, and she has been able to negotiate a new interest rate of 8% p.a.

b) How long would it take Andrea to repay the loan?

c) If she cannot afford to increase her current repayments, and is unable to negotiate a better interest rate, recommend a strategy to reduce the total length of time to repay the loan? Based on this strategy, how much interest would she save?

Answer 1

A Initial Loan amount 15,000

APR % =25 %

Time = 5 Years

So

Monthly Amortization payments = P* (i/m) / (1-(1+i/m)^-mt

Where P = Principal Loan

I= Interet rate

M = no of payments per period

Monthly Payments = 15000*(0.25/12) / 1-(1+0.25/12)^-5*12

=$ 440.27

B

Now after negotiation ,

The New rate = 8%

Maximum she affords to pay = 600

So the time to repay

600 = 15000*(0.08/12) / 1-(1+0.08/12)^-t

Solving for t

T= 27.43 months

So it will take approximately 28 Monthly payments for the repayment of the loan

C

Andrea can consider with a pre downpayment option in order to reduce the interest obligation on the loan

So on a 20 % downpayment

We get the

Old interest = 1464.06

Total new interest as = 922.45

So the interest savings of 541.5 can be done with a pre downpayment