Question

After visiting several automobile dealerships, Richard selects the used car he wants. He likes its $14,400 price, but financing through the dealer is no bargain. He has $3,500 cash for a down payment, so he needs an $10,900 loan. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $10,900 for a period of four years at an add-on interest rate of 12 percent. What is the total interest on Richard's loan? What is the total cost of the car?

Answer 1

Answer:

Richard

a. The total interest on Richard's loan is:

= $5,232.

b. The total cost of the car is:

= $19,632.

Explanation:

a) Data and Calculations:

Cost of car selected = $14,400

Down payment on car = 3,500

Loan obtained =          $10,900

Interest rate = 12% add-on

Period of loan = 4 years

Total interest on the loan = $5,232 ($10,900 * 12% * 4)

Total cost of the car = $19,632 ($14,400 + $5,232)

b) Richard will be paying annual interest of $1,308 for four years, which will total $5,232 since interest is paid on the full amount borrowed for each year, despite the fact that some portion of the principal has been repaid.