Question

You wish to purchase a new car and can afford monthly payments of up to $200 per month. You see a car you like for $8,000 and are offered financing to secure the purchase. The terms are that the loan lasts for 7 years and the annual interest rate is 16.9%. Can you afford to purchase the car on finance?

Answer 1

Yes, you can afford to purchase the car on finance. The monthly payment comes out to be approximately $172.17, which is less than your budget of $200 per month.

Step-by-step explanation:

To determine if you can afford to purchase the car on finance, we need to calculate the monthly payment based on the loan terms.

Step 1: Convert the annual interest rate to a monthly interest rate by dividing it by 12.

Step 2: Calculate the number of monthly payments by multiplying the number of years by 12.

Step 3: Use the formula for calculating the monthly payment on a loan:

Monthly payment = Principal * Monthly interest rate / (1 - (1 + Monthly interest rate)^(-Number of payments))

Plug in the values:

Principal = $8,000

Monthly interest rate = 16.9% / 12 = 0.0141

Number of payments = 7 * 12 = 84

Calculate the monthly payment:

Monthly payment = 8000 * 0.0141 / (1 - (1 + 0.0141)^(-84))

Using a calculator, the monthly payment comes out to be approximately $172.17.

Since the monthly payment is less than your budget of $200 per month, you can afford to purchase the car on finance.