Question

Ahmed wants to get a loan from his credit union for $20,000 to buy a new car. He can get an interest rate of 5% and can pay off the loan in 5 years. How much will Ahmed pay each month?, How much will Ahmed pay in interest?

Answer 1

Explanation:

The cost of the new car is $20,000.

We would apply the periodic interest rate formula which is expressed as

P = a/[{(1+r)^n]-1}/{r(1+r)^n}]

Where

P represents the monthly payments.

a represents the amount of the loan

r represents the annual rate.

n represents number of monthly payments. Therefore

a = $20000

r = 0.05/12 = 0.0042

n = 12 × 5 = 60

Therefore,

P = 20000/[{(1+0.0042)^60]-1}/{0.0042(1+0.0042)^60}]

20000/[{(1.0042)^60]-1}/{0.0042(1.0042)^60}]

P = 20000/{1.286 -1}/[0.0042(1.286)]

P = 20000/(0.286/0.0054012)

P = 20000/52.95

P = $378

Ahmed will pay $378 each month

The total payment is

378 × 60 = $22680

The amount that Ahmed will pay in interest is

22680 - 20000 = $2680