Question

After visiting several automobile dealerships, Richard selects the car he wants. He likes its $20,000 price, but financing through the dealer is no bargain. He has $4,000 cash for a down payment, so he needs a loan of $16,000. In shopping at several banks for an installment loan, he learns that interest on most 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 $16,000 for a period of four years at an add-on interest rate of 11 percent.

a. What is the total interest on Richard's loan?
Total interest
b. What is the total cost of the car?
Total cost
c. What is the monthly payment?
Monthly payment

Answer 1

Answer and Explanation:

The computation is shown below:

a. The total interest is

= Principal × rate of interest × time period

= $16,000 × 4 years × 11%

= $7,040

b. The total cost of the car is

= Price of the car + interest

= $20,000 + $7,040

= $27,040

c. The monthly payment is

= (Principal amount + interest) ÷ number of months

= ($16,000 + $7,040) ÷ 48 months

= $480