Question

13. You have reviewed your budget and determined that you can afford to pay $300 per month as a car payment. How much can you borrow if your credit is good and the interest rate is 4 percent using a 48 month loan? How much can you borrow if your credit is bad and the interest rate is 8 percent using the same loan term? This problem is similar to Example 5-5 on page 159. 1 Affordable payment $300 2 Desired term of loan in months 48 B Good credit annual interest rate 4% 7 Good credit monthly interest rate 0.33% 5 Good credit loan maximum (PV) Solution: $13,286.65 5 Bad credit annual interest rate 8% - Bad credit monthly interest rate 0.67% Bad credit loan maximum (PV) Solution: $12,288.57 In this example, if you have bad credit but the car you want requires that you borrow $13,250, how could the financing be changed to allow you to borrow more money without increasing your payment?

How to calculate the content of green grid? Thank you

Answer 1

A. 4%

Formula: The present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The amount which can be Borrowed today) ?
C= Periodic cash flow. 300
r =effective interest rate for the period. 0.04/12= 0.00333
n = number of periods. 48

PV= 300× [1-(1+0.00333)^-48]/0.00333

Present value= $13,286.65

Good credit loan maximum=$13,286.65

B. 8%

Formula: The present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The amount which can be Borrowed today) ?
C= Periodic cash flow. 300
r =effective interest rate for the period. 0.08/12= 0.006667
n = number of periods. 48

PV= 300× [1-(1+0.006667)^-48]/0.006667

Present value= $12,288.57389

Bad credit loan maximum=$12,288.57

C. The number of monthly payments required should be increased to more than 48 months.