Question

Oh, boy! Look at that monthly payment from Question 2 above! Molly cannot afford the monthly payment using the 0% financing. She opens up Bankrate’s Loan Calculator to see how much she’d pay with the other financing option.

Remember that Molly has a $2500 down payment saved for this purchase. The dealer will take the $500 Cash Allowance straight off her total. How much loan does Molly need?

Using the Loan Calculator and the 1.9% APR offer, how much will Molly’s monthly payment be?

How much total interest will Molly pay using this plan?

When Molly adds all of her payments, how much will the car cost her using this plan?

Answer 1

The car payment plan that has an APR of 1.9% is, on the short term, pocket

friendly.

The correct responses are;

• First part: The amount of loan Molly needs is $22,495

• Second part: Molly's monthly payment will be approximately $286.2

• Third part: The total interest Molly will pay using the plan is approximately $1,545.8

• Fourth part: The amount the car costs Molly using the plan is approximately $26,540.8

Reasons:

The question parameters are;

Molly is comparing Auto Loans on Jeep website

Selling price of the Jeep, P = $25,495

The down payment Molly has = $2,500

The Cash Allowance = $500

Number of months of payment, n = 84 months

The Annual Percentage Rate, APR, r = 1.9%

First Part:

Loan needed = $25,495 - $2,500 - $500 = $22,495

The amount of loan Molly needs = $22,495

Second Part:

The monthly payment is given by the formula;

• $\displaystyle M = \mathbf{\dfrac{P \cdot \left(\dfrac{r}{12} \right) \cdot \left(1+\dfrac{r}{12} \right)^n }{\left(1+\dfrac{r}{12} \right)^n - 1}}$

Therefore;

$\displaystyle M = \dfrac{22,495 \times \left(\dfrac{0.019}{12} \right) \times \left(1+\dfrac{0.019}{12} \right)^{84} }{\left(1+\dfrac{0.019}{12} \right)^{84} - 1} \approx \mathbf{286.2}$

Molly's monthly payment will be M ≈ $286.2

Third part:

The total interest, I = Sum of payment - Loan amount

∴ The total interest, I ≈ $286.2/month × 84 month - $22,495 ≈ $1,545.8

The total interest Molly will pay using the loan, I ≈ $1,545.8

Fourth part:

The cost of the car, C, using the 1.9% APR financing plan is the sum of the down payment plus sum of the loan repayment

Therefore;

C ≈ $2,500 + $286.2/month × 84 months = $26,540.8

The cost of the car using the 1.9% APR financing plan, C ≈ $26,540.8

The question parameters obtained from a similar question are;

Selling price of the car = $25,495

Financing = 1.9% APR for 84 months with a cash allowance of $500

Learn more about loan payment here:

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