Question

You can afford to make a payment of $250 per month for the next 40 months. If the APR on a loan to purchase a used car is 12 percent, what is the maximum loan amount for which you are eligible?

$10,000.00

$ 9,755.35

$ 8,208.67

$ 7,333.33

none of the above.

Answer 1

The maximum loan amount is computed as shown below:

= Monthly payment x [ (1 - 1 / (1 + r)ⁿ ) / r ]

r is computed as follows:

= 12% / 12

= 1 % or 0.01

So, the loan amount will be:

= $ 250 x [ ( 1 - 1 / (1 + 0.01)⁴⁰ ) / 0.01 ]

= $ 250 x 32.83468611

= $ 8,208.67 Approximately

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