Consider a $30,000 car loan over six years at 7% APR. Assume an option where the car loan offers 0% financing for the first two years of the loan or 7% financing over six years. What are the payment choices to ensure that no interest on the loan is paid?
What will be an ideal response?
Answer: There are two methods to consider. First, you can make 24 equal payments of = $1,250. This will pay off the entire loan before interest is charged. Second, you can make the regular 7% APR payments for two years and then pay off the balance with what is called a balloon payment. The PVIFA factor for 6 × 12 = 72 periods and a periodic interest rate of = 0.58333% is:
PVIFA = 58.65444. The monthly annuity payment is: PMT = = = $511.47. The total monthly payments for two years would be 24 × $511.47 = $12,275.28. Therefore, your balloon payment at the end of two years would be $30,000.00 - $12,275.28 = $17,724.72.
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