You want to buy a new car for $30,000 and want to finance $20,000 of the purchas

Question

You want to buy a new car for $30,000 and want to finance $20,000 of the purchase price (you will put $10,000 down out of your own pocket). You want to get an idea of the difference between the monthly payments on a 4-year (i.e., 48-month) versus a 5-year (60-month) loan. The stated rate on the 4-year loan is 3 percent (.03) while the stated rate on the 5-year loan is 3.5 percent (.035); both are compounded monthly. What are the monthly payments of each of these loans? Both loans require the first payment to be made exactly one month from now.

Some loans allow you to make payments every half month rather than every month. Consider the 5-year loan above. If instead of making 60 monthly payments (with the first payment exactly a month from now) you make 120 half-monthly payments (with the first payment exactly one half month from now), what is the difference in the total monthly payment between these two cases?

Explanation / Answer

Monthly Payment for 5 year loan paid on monthly basis is $363.83; Monthly Payment for 4 year loan paid on monthly basis is $442.69;Monthly Payment for 5 year loan paid on every half monthly basis is $197.77; Total monthly payment between 5 year loan paid on monthly basis and 5 year loan paid on every half monthly basis is $31.71.

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