Question

Review your car loan. Calculate the interest you will pay based on the number of years you will have the loan. Can you pay extra each month to reduce the total number of payments? Share your results on the discussion board.

Answer 1

Assume I took a $ 5000 loan to buy a car. The rate of interest charged 5% with monthly payments for a period of 7 years. We can use the excel PMT function to calculate the monthly EMI’s:

=PMT(rate,nper,pv,fv)

rate=monthly interest rate=5/12=0.4167%

nper= number of payments= 7*12=84

pv=present value= - 5000

fv=future value= 0

=pmt(0.004167, 84, -5000,0)

= $ 70.67

Now suppose instead of paying $ 70.67 I start paying $ 100 every month. This will reduce the number of payments I have to make. We can use the excel nper function

=nper(rate,pmt,pv,fv)

rate=0.4167%

pmt= $ 100

pv=-5000

fv=0

=nper(0.004167,100,-5000,0)

=56.18 months

=56.18/12=4.68 years