Question 1137080: Hi,
I really would appreciate a bit of help with this problem:
Suppose that you borrow $30,000 to pay for college. You can select one of the following loans, each requiring regular monthly payments.
Installment Loan A: ten-year loan at 4.7%
Installment Loan B: five-year loan at 6.2%
1. Find the (a) monthly payments, (b) total payback amount and (c) total interest for Loan A and B. Show your work.
2. Which loan would you prefer to take out and why?
Thank you in advance!
Answer by rothauserc(4718)   (Show Source):
You can put this solution on YOUR website! The formula for installment loan calculations is
:
Monthly Payment = ( r * PV ) / ( 1 - ( 1 + r )^(-n) )
:
Where r is the annual interest rate divided by 12, PV is the loan amount, and n is the total number of payments
:
Loan A
:
n = 10 * 12 = 120
:
r = 0.047 / 12 = 0.0039
:
Monthly Payment = ( 0.0039 * 30000) / (1 - (1 + 0.0039)^(-120) ) = $313.52
:
Total Payback Amount = $37622.40
:
Total Interest = $7622.40
:
LOAN B
:
n = 5 * 12 = 60
:
r = 0.062 / 12 = 0.0052
:
Monthly Payment = ( 0.0052 * 30000) / (1 - (1 + 0.0052)^(-60) ) = $583.34
:
Total Payback Amount = $35000.40
:
Total Interest = $5000.40
:
Choose LOAN B since it requires $2622 less interest ($5000.40 vs $7622.40)
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