Question

After visiting several automobile dealerships, Richard selects the car he wants. He likes its $11,500 price, but financing through the dealer is no bargain. He has $2,300 cash for a down payment, so he needs a loan of $9,200. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $9,200 for a period of two years at an add-on interest rate of 10 percent.


a. What is the total interest on Richard's loan?

b.What is the total cost of the car?

c. What is the monthly payment?

d. What is the annual percentage rate (APR)?

Answer 1

Answer:

The answers are:

A) total interest = p x r x t

where:

• p = $9,200
• r = 10%
• t = 2 years

total interest = $9,200 x 10% x 2 = $1,840

B) the total cost of the car = down payment + principal + total interest

total cost = $2,300 + $9,200 + $1,840 = $13,340

C) monthly payment = (principal + total interest) / total number of payments

monthly payment = ($9,200 + $1,840) / (12 x 2) = $11,040 / 24 = $460

D) APR = (total payments x total interest) / [principal x (total payments +1)]

APR = (24 x $1,840) / ($9,200 x 25) = 0.192 or 19.2%