Question

Assume that you purchased a new car today and financed $55,000 of the price on a 72-month payment contract with a nominal rate of 6.00%. Further, assume that you plan on paying off the balance of the car loan after you make your 48th payment. How much will your loan balance be when you pay off the car?

Answer 1

Answer:

The amount that your loan balance will be when you pay off the car is $20,566.18.

Step-by-step explanation:

Step 1. Calculation of monthly payment

This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PV = Present value or the cost of the new car = $55,000

P = Monthly payment = ?

r = Monthly nominal rate = Nominal rate / 12 = 6% / 12 = 0.06 / 12 = 0.005

n = number of months = 72

Substitute the values into equation (1) and solve for P, we have:

$55,000 = P * ((1 - (1 / (1 + 0.005))^72) / 0.005)

$55,000 = P * 60.3395139355201

P = $55,000 / 60.3395139355201 = $911.51

Step 2. Calculation of the loan amount balance when you pay off the car

This can be calculated using the ballon payment formula as follows:

P = (PV - (Ballon / (1 + r)^n)) * (r / (1 – (1 + r)^-n)) ...................... (1)

Where:

P = Monthly payment = $911.51

PV = Present value or the cost of the new car = $55,000

Ballon = Ballon payment or the loan amount balance when you pay off the car = ?

r = Monthly nominal rate = Nominal rate / 12 = 6% / 12 = 0.06 / 12 = 0.005

n = number months to pay off the loan amount balance = 48

Substituting the values into equation (1) and solve for Ballon, we have:

911.51 = (55,000 - (Ballon / (1 + 0.005)^48)) * (0.005 / (1 - (1 + 0.005)^-48))

911.51 = (55,000 - (Ballon / 1.27048916109538)) * 0.0234850290479363

911.51 / 0.0234850290479363 = 55,000 - (Ballon / 1.27048916109538)

38,812.39 = 55,000 - (Ballon / 1.27048916109538)

Ballon / 1.27048916109538 = 55,000 - 38,812.39

Ballon / 1.27048916109538 = 16,187.61

Ballon = 16,187.61 * 1.27048916109538

Ballon = $20,566.18

Therefore, the amount that your loan balance will be when you pay off the car is $20,566.18.