You are considering a car loan on a $30,000 car for 5 years with monthly car payments. Bank One quotes you an interest rate on their loan at 0.5% per month compounded monthly. Bank Two quotes you an interest rate of 6.5% compounded annually. Your payments will be monthly.

Required:

1. What are your payments for each loan?

Bank one $579.98

Bank two $586.70

Explanation:

The payment in each case can be computed using the pmt formula in excel as shown below:

=pmt (rate, nper,-pv, fv)

Bank One:

rate is the monthly rate of interest at 0.5% per month

nper is the number of months the car loan would be repaid which is 5 years multiplied by 12 months i. e 60

pv is the amount of the loan which is $30,000

fv is the future worth of the loan which is not known, hence taken as zero

=pmt (0.5%,60,-30000,0) = $579.98

Bank Two

rate is the monthly rate of interest at 0.54% per month (6.5%/12)

nper is the number of months the car loan would be repaid which is 5 years multiplied by 12 months i. e 60

pv is the amount of the loan which is $30,000

fv is the future worth of the loan which is not known, hence taken as zero

=pmt (6.5%/12,60,-30000,0) = $586.70