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Calculating total interest, monthly payment and APR

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After visiting several automobile dealerships, Richard selects the used car he wants. He likes its $10,000 price,but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs an $8,000 loan. In shopping at several banks for an installment loan, he learns that most interest on 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 $8,000 for a period of 4 years at an add-on interest rate of 11%. What is the total interest on Richard's loan? What is the total cost of the car? What is the monthly payment? What is the annual percentage rate (APR)?

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Solution Summary

Solution describes the steps to calculate interest, monthly installment and APR for a add-on loan.

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Please refer attached file for better understanding of formulas.

Solution:

What is the total interest on Richard's loan?
Total Interest on loan=Loan amount*rate*Number of months in the loan/12
=8000*11%*48/12=$3520

What is the total cost of the car?
Total Cost of Car=Down Payment+ Loan amount+ Interest
=2000+8000+3520
=$13520

What is the monthly ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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