Question

You borrow $8000 to buy a car, at an annual interest rate of 6%. Assume interest is compounded continuously. You make monthly payments (approximate as continuous payments).

How much should you pay each month to pay off the loan in 3 years?

Answer 1

We should pay $243.3 each month to pay of the loan.

Step-by-step explanation

The present value of the loan is 8,000, the number of compounding periods are (3*12) =36 because payment is going to be made monthly for 3 years, the future value of the loan is 0 as there will be no lump sum payment at the end of the loan and equal payments each month, the monthly interest rate is 6%/12= 0.5%. We input these 4 values to find the monthly payment.

PV= 8,000

FV=0

N=36

I=0.5

Compute PMT= 243.3