Question

Amal is planning to purchase a car. The sticker price is $35,000. Provincial sales taxes of 15% would apply. Amal has $5,000 to use as a down payment. The bank will charge her 7.75% on her car loan, compounded monthly. She will make monthly loan payments.

Part a

How much would Amal save if she paid the car off over 4 years instead of 5 years?

Part b

Assuming she chooses to pay the car off over 5 years, how much interest will she pay in the first year of her loan?

Part c

What is the effective annual rate that Amal is paying on her car loan?

Answer 1

Sticker price	$35,000
Add: PST at 15%	5250
Total Price	$40,250
Less: Down payment	5000
Finance amount	$35,250
Now we will find EMI under 4 year and 5 year assumption
Under 4 Yrs
EMI	$856.42
	=PMT(7.75%/12,48,-35250)
Total payment	41108.40
(856.42 x 48)
Under 5 Years
EMI	$710.53
	=PMT(7.75%/12,60,-35250)
Total payment	42631.97
(710.53 x 60)
Savings in interest	$ 1,523.57	Ans part a
(42631.97-41108.40)
$                    (2,521.55)	2521.55	Ans Part b
=CUMIPMT(7.75%/12,60,35250,1,12,0)
Effective rate	8.03%	Ans part C
	=EFFECT(7.75%,12)