- Budgeting
- Cash Management
- Consumer and Mortgage Loans
- Debt and Debt Reduction
- Time Value of Money 1: Present and Future Value
- Time Value of Money 2: Inflation, Real Returns, Annuities, and Amortized Loans
- Insurance 1: Basics
- Insurance 2: Life Insurance
- Insurance 3: Health, Long-term Care, and Disability Insurance
- Insurance 4: Auto, Homeowners, and Liability Insurance
- The Home Decision
- The Auto Decision
- Family 1: Money and Marriage
- Family 2: Teaching Children Financial Responsibility
- Family 3: Financing Children’s Education and Missions
- Investments A: Key Lessons of Investing
- Investments B: Key Lessons of Investing
Problem 8: Buying a Car
You take out a loan for $36,000 to purchase a new car. If the interest rate on this loan is 15 percent, and you want to repay the loan in four annual payments, how much will each annual payment be? How much interest will you have paid for the car loan at the end of four years?
Before solving this problem, clear your calculator's memory and set your calculator to one annual payment. Input the following information into your financial calculator:
- PV = –$36,000
- N = 4
- I = 15
- PMT = ?
Solve for your PMT to get $12,609.55.
The amount of interest you will have paid after four years is equal to the total amount of the payments ($12,609.55 * 4 = $50,438.20) minus the cost of your automobile ($36,000); the total comes to $14,438.21. That is one expensive loan! In fact, the interest is more than the cost of another less expensive car. If you want to buy this car, go ahead—but don't buy it on credit—save for it!
