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Topic: Auto Loan formula
Replies: 5   Last Post: Aug 30, 2000 7:29 PM

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Joe Ascoly

Posts: 23
Registered: 12/13/04
Auto Loan formula
Posted: Aug 30, 2000 5:20 PM
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Acomment about short term loan calculations

At one time short term loans for cars were done differently than
mortgage loans for homes.
Car loans were considered short term loans.
They were done as follows Buy a $6000 car interest at 6% per year
and 24 months to pay back at 280 a month.
6% of 6000 is 360 and for two years thats 720 + 6000= 6720
6720/24 = 280 However if this loan were treated as a home loan
the interest rate would be 11.13%. This lead to calling the
6% the nominal rate and the 11.13 the effective rate. (APR)
In the 1950's Paul Douglas pressed for A truth in lending law
which finally passed in 1968 and in 1969 the Federal Reserve
formalized the truth in lending with Regulation Z. Soon after
college algebra text book carried problems like this. At FSU
the Lial Miller college algebra text book had such problems.
The problem with this law was at the time there were no tools
for people issuing loans to compute financial math.
The formula for A the monthly payment is

A = P( i/(1-v^n))

Where P is the loan amount n the period and
v^n = (1-i)^-n

To solve the problem of what is the effective rate for
a given nominal rate involves iteration. Back in
1978 when I saw the problem the HP financial analyst could
solve this problem.

Now lenders like banks have computer program that can
compute and provide the disclosure statement for any loan
and I believe the old short term methods is no longer in use.

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