Suppose that you decide to borrow $17,000 for a new car. You can select one of t

Question

Suppose that you decide to borrow $17,000 for a new car. You can select one of the following amortized loans, each requiring regular monthly payments.

Installment Loan A: three-year loan at 5.9%

Installment Loan B: five-year loan at 7.2%

Complete parts a. through c. below.

A. Find the monthly payments and the total interest for Loan A.

b. Find the monthly payments and the total interest for Loan B. The monthly payment for Loan B is

The total interest for Loan B is

c. Compare the monthly payments and the total interest for the two loans.

Determine which loan is more economical. Choose the correct answer below.

Explanation / Answer

a. Loan Amount(P)= $17,000 Rate ( r)= 5.9% Number of payment (n)= 12 Time(t)= 3 years PMT= P(r/n)/1-(1+r/n)^-nt =17,000(0.059/12) /1-(1+0.059/12)^-12(3) =83.58/0.162 =515.93 or 516 Monthly Payment = $ 516 Now we calculate the interest paid over 3 years or 36 months. Total monthly payment - Amount of the Loan =(516 X 36) -17,000 =18,576-17,000 = $1576 b. Loan Amount(P)= $17,000 Rate ( r)= 7.2% Number of payment (n)= 12 Time(t)= 5 years PMT= P(r/n)/1-(1+r/n)^-nt =17,000(0.072/12) /1-(1+0.059/12)^-12(5) =102/0.3106 =328.40 or 328 Monthly Payment = $ 328 Now we calculate the interest paid over 5 years or 60 months. Total monthly payment - Amount of the Loan =(328 X 60) -17,000 =19,680-17,000 = $2680 c. By comparing monthly payment Loan A is economical and by comparing interest , Loan B is more economical

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