Question

You can afford a $300 per month car payment. You've found a 5 year loan at 7% interest. How big of a loan can you afford?

Answer 1

You can afford a loan of approximately $16,568 for a 5-year period at 7% interest, with a monthly payment of $300.

Step-by-step explanation:

To determine the loan amount you can afford, you can use the formula for calculating the loan payment, which is given by:

`\[ \text{Loan Payment} = (P * r * (1 + r)^n)/((1 + r)^n - 1) \]`

Where ( P ) is the loan principal, r is the monthly interest rate, and ( n ) is the number of payments.

Given that the monthly payment is $300, the interest rate is 7% (or 0.07), and the loan term is 5 years (or 60 months), we rearrange the formula to solve for the loan principal:

`\[ P = (300 * \left((0.07)/(12)\right) * \left(1 + (0.07)/(12)\right)^(60))/(\left(1 + (0.07)/(12)\right)^(60) - 1) \]`

Solving this equation yields a loan principal of approximately $16,568. Therefore, with a $300 monthly payment and a 5-year term at 7% interest, you can afford a loan of about $16,568.

This calculation assumes a constant monthly payment throughout the loan term and doesn't account for other expenses like taxes, insurance, or additional fees associated with the loan. It's crucial to consider these factors when finalizing a loan agreement to ensure your overall financial comfort and stability. Always consult with a financial advisor or loan specialist to determine the best loan option suited to your financial situation.