Car Loan Rates
Date: 08/27/97 at 11:55:45 From: Tina Fulton Subject: Help with car purchase Dear Dr. Math, I need to buy a car and wondered if you could find the time to help me figure something. Please show me how to calculate the impact of different interest rates on a 5 yr. loan (60 payments) of $20,000. My credit union will loan me that amount at 8.4 percent, and they estimate payments of about $400 a month. The salesman at the dealership is putting heat on me to use their loan service, which can give me the loan at 8.0 percent, possibly less. So my question is: how much would I save over the next 5 years if I take the car dealership loan at 8 percent or at 7 1/2 percent? Does it make sense to try to whittle them down $300 or $400 on the price of the car and then stay with my credit union loan, or would I gain substantially by getting the $20,000 loan financed for 1/2 percent or even 1 percent less? I would appreciate it if you could supply me with actual figures. I'm sorry if this is confusing, but I only purchase a new car about once every decade and I'm a rookie at this. Thanks, Tina Fulton
Date: 08/27/97 at 13:23:17 From: Doctor Ceeks Subject: Re: Help with car purchase Hi, Before answering, you must understand that Ask Dr. Math is not responsible for any consequences of any decisions you make based on the information in our responses. We are not offering you any advice, but can treat this problem in the abstract as a math question involving interest rates. There is already a nice derivation of relevant information in Doctor Anthony's response to a related question at the site; please take a look at it: http://mathforum.org/dr.math/problems/chevellemn.7.4.96.html In your case, I compute the following monthly payments: At 8.4 percent: $409.37 At 8.0 percent: $405.53 At 7.5 percent: $400.76 ($20,000 loan with monthly installments over 5 years) The savings between 8.4 percent and 8.0 percent are about $230, and the savings between 8.0 percent and 7.5 percent are about $286. I've tried to be accurate, but please double-check the arithmetic for yourself. -Doctor Ceeks, The Math Forum Check out our web site! http://mathforum.org/dr.math/
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