6. (6p) You need to purchase a car, but don't have the money to buy it outright. Therefore, you'll have to borrow money for a loan. Your current situation is this: • The car you want to buy costs $11,999 • You have $5500 saved for a down payment on the car. • The dealer offers add-o interest loans for 7% per year, for 1, 3, or 5 years. • You want to keep your car payments under $250 per month. (a) Calculate the monthly payments for 1, 3, or 5 years. Can you afford any of these loan terms? Explain. (b) Compute the total interest you'll pay over the life of each loan.
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![6. (6p) You need to purchase a car, but don't have the money to buy it outright. Therefore, you’ll have to
borrow money for a loan. Your current situation is this:
• The car you want to buy costs $11,999
• You have $5500 saved for a down payment on the car.
• The dealer offers add-on interest loans for 7% per year, for 1, 3, or 5 years.
• You want to keep your car payments under $250 per month.
(a) Calculate the monthly payments for 1, 3, or 5 years. Can you afford any of these loan terms?
Explain.
(b) Compute the total interest you'll pay over the life of each loan.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F27bb0e7a-191b-46fb-8a17-3345b5e6a536%2F8069444e-5969-4d37-811e-ba72f90018b1%2Ffcalqq_processed.png&w=3840&q=75)
![](/static/compass_v2/shared-icons/check-mark.png)
Installments are the amount of periodic payments the borrower needs to pay to the lender in order to pay back his loan.
P = principal amount
r = rate of interest
n = number of periods
a) According to the question, we need to calculate the installment amount in each of the loan terms and evaluate the affordability of the car.
Case 1: loan term is 1 year
The monthly installment in case of 1 years loan will be $562.30
Case2: loan term is 3 year
The monthly installment in case of 3 years loan will be $200.66
Case 3: loan term is 5 year
The monthly installment in case of 5 years loan will be $128.68
CONCLUSION
YES, the borrower can afford loan terms of 3 and 5 years, because he wants to keep the loan installment less than $250 per month. His monthly payments will be less than $250 in both cases.
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