Question

Someone needs to borrow ​$12,000 to buy a car and the person has determined that monthly payments of ​$275 are affordable. The bank offers a 3​-year loan at 6​% ​APR, a 4​-year loan at 6.5​%, or a 5​-year loan at 7​% APR. Which loan best meets the​ person's needs?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

C D E F Affordable Monthly payment $275.00 $12,000.00 Loan-1 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 6.00% 0.50% 36 10 $365.06 12 $12,000.00 15 16 Loan-2 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 6.50% 0.54% 48 $284.58 20 $12,000.00 Loan-3 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 7.00% 0.58% $237.61 Loan that best meets the person's need Loan-3; a 5-year loan at 7% APR Because loan-3 monthly payment is within his affordable monthly payment limit. 32 33

Cell reference -

B Affordable Monthly payment 12000 Loan-1 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 0.06 =C7/12 =C6*12 =PMT(C8,C9,-C5,,0) 10 12 12000 15 16 Loan-2 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 0.065 C15/12 =C14*12 =PMT(C16,217,-C13,,0) 20 12000 Loan-3 Loan Amount Term in years APR Monthly interest rate No.of monthly payment Monthly payment amount 0.07 =C23/12 =C22*12 =PMT(C24,C25,-C21,,0) Loan that best meets the person's need Loan-3; a 5-year loan at 7% APR Because loan-3 monthly payment is within his affordable monthly payment limit. 32 33

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.