Final answer:
Understanding the APR of a car loan is critical for determining the monthly payment and total cost. Calculating these requires using loan amortization formulas or calculators, which can vary based on loan terms and payment amounts.
Step-by-step explanation:
When considering a car loan with a stated Annual Percentage Rate (APR), it is important to understand the loan terms and calculate the monthly payment or total cost of the loan. The APR is the interest rate for a whole year (annual), rather than just a monthly fee/rate, and includes any fees or additional costs associated with the loan. The APR reflects the actual yearly cost of funds over the term of a loan.
Car Loan Example
For instance, if you’re calculating the monthly payment on a $20,000 car loan with a 6% annual interest rate convertible monthly, you would need to use a loan amortization formula or a calculator that applies this formula. Payments can vary based on the loan term and whether any additional payments are made to the principal. For example, paying off monthly installments of $500 would pay off the loan faster and with less interest accrued than monthly installments of $100.
Loan Calculations
To determine how much you can afford, like how Joanna knows she can afford to pay $12,000 a year for a house loan, you can use present value formulas or online calculators to estimate the maximum loan amount you are eligible for based on the annual payment amount and interest rate.