Question

Carmen is in the process of buying a car. She knows she needs a car loan, but she is unsure about which financial institution she should obtain the car loan from. Should she take out a loan with a loan period of four years? Five years? Six years? She has $3,000 for the down payment, and the cost of the car after tax and license fees will be $8,500. She has a credit score of 620. Her budget will allow her to make payments as high as $150 per month. Remember, the goal is to find the most cost-effective option. Which car loan should Carmen choose?

Answer 1

She should take out a loan with a loan of 5 years period. In the cost and benefit term, it would better to take out the shorter loan period because automobile price tends to decrease in the following year after it has been bought. However, Carmen will not be able to fulfill the 4-year loan payment for each month, because the average auto loan interest rate for a person with 620 credit score is 9.48%. Carmen able to pay 7.72% ((48 x 150)-(8,500-3,000))/(8,500-3,000) interest on 4-year loan and 12.72% ((60 x $150)-($8,500-$3,000))/($8,500-$3,000) on 5-year loan. It would be a safe decision to choose the 5-year loan because Carmen still able to pay the loan interest.