Question

Bill intends to buy a car from a car dealer for a price of $45,000. He has $5,000 of his own money that he can use to pay for the car and is considering financing the remaining amount by taking out a loan from a bank. The bank that Bill approaches is willing to offer him a 5 -year loan for $40,000 at 6% per annum that has equal monthly payments covering the principal and interest. Payments will be made at the end of the month.

REQUIRED:
What is the monthly payment Bill needs to make to pay off the loan? (2 marks)

Answer 1

Answer: Approximately $759.96.

Explanation:

To calculate the monthly payment for Bill's loan, we can use the formula for calculating the monthly payment of a loan:

Monthly Payment = P * r * (1 + r)^n / ((1 + r)^n - 1)

Where:

P = Principal amount (loan amount)

r = Monthly interest rate

n = Total number of monthly payments

Let's calculate the monthly payment using the given information:

Principal amount (P) = $40,000

Annual interest rate = 6%

Monthly interest rate (r) = Annual interest rate / 12 = 6% / 12 = 0.06 / 12 = 0.005

Total number of monthly payments (n) = 5 years * 12 months/year = 60 months

Plugging these values into the formula, we get:

Monthly Payment = 40,000 * 0.005 * (1 + 0.005)^60 / ((1 + 0.005)^60 - 1)

Calculating this expression gives us the monthly payment Bill needs to make to pay off the loan.