Repaying Loans

  Senario One Lower the interest rate provided in the senario by one percentage point. Determine the amount of interest your friend will pay with this new interest rate and how much money will be saved over the length of the loan. Write a 1-paragraph memo explaining to your friend why the new interest rate is the better choice. I am choosing to go with a car that we have been looking into for awhile now. Its a 2014 Dodge Hellcat. Its a very nice and fast car but very expensive, so been looking at the best rates. The car is going for $36,000 and the interest rate is at 4% right now. Interest Rate= 4% Sale Price= $36,000 Years Financed= 8 years A= 36,000 x (1+(0.04 x 8)) A= 36,000 x (1+.32) A=36,000 x 1.32 A= 47,520 So I believe that my payment would be around $500 a month but that is a long time to pay for a vehicle and I think that is still a lot of money for a vehicle. The rate is already pretty low so if I was to be able to drop it lower by one year then my rate would go down to well maybe 3% since the rate is already extremely low. A=36,000 x (1+(0.03 x8)) A=36,000 x (1 + 0.24) A=36,000 x 1.24 A=44,640 So this does not drop my payment by that much but it does bring it to around $465 ish so it is a little drop. Im not sure if any of it is a good idea and it doesn't matter which way you look at it because it is still a lot of money for a vehicle in general. That doesn't even factor in the insurance and maintenance a car like this would take. But I guess with a rate like that it is something that will not last long and im sure rates will go up within the next year not down so maybe this is some that I could possibly consider.   Senario Two I will be taking out a loan to purchase a 2021 Mercedes Benz S Class , which has a purchase price of $110,850.00. My chosen interest rate was 3.25%, described as .0325 in decimal form, with a 7 year loan term. Using the simple interest formula, I performed the following: A= $110,850.00 x (1+ (0.0325 x 7) = $110,850.00 x (1+ (0.2275)) = $110,850.00 x (1.2275) = $136,068.38 This means that total interest amount when purchasing the Mercedes Benz S Class, with a 7 year loan term and interest rate of 3.25%, equals $25,218.38- which is equivalent to the total amount after seven years minus the original selling price, or ($136,068.38- $110,850.00). To determine monthly payment, I did the following: monthly payment= total amount/term in months = $136,068.38 / (12x7) = $136,068.38 / 84 = $1,619.86 If we lower the loan term by one year, we must perform the following: = $110,850.00 x (1+ (0.0325x6)) = $110,850.00 x (1+ (0.195)) = $110,850.00 x (1.195) = $132,465.75 Therefore, with a term shortened by one year, the new total cost is $132,465.75. to compute the new monthly payment, we must divide this total amount by 72 months, or 6 years. $132,465.75 / 72 = $1,839.80, which is our new monthly payment. It isn't surprising that the new monthly payment total is higher, considering we shortened the term by twelve months. In order to afford the escalated price given this shorter term, I could stop indulging in small niceties like eating out, squeeze my grocery budget, or rent out the extra room in my house.   Imagine that your friend has signed up for a variable rate loan, which means that the interest rate can change. Assume that your friend has paid back half of the loan when the interest rate increases by 5%. How much time is left on the loan? How much will need to be paid in interest during the second half of the loan? Explain to your your friend how much this interest rate change will affect the overall balance by comparing the original total cost to the new total cost. (Hint: Be sure to consider both the first half of the loan and second half when finding the new total payment.)