Tim wants to buy a new Honda which costs $20,000. He will pay a down payment of 10 percent and finance the rest at 12 percent. If he finances the car over 5 years, how much less will his monthly payments be compared to financing it over 3 years?

Accepted Solution

Answer:     $197.46 less each montly payment if you pay it in 5 years than 3 yearsStep-by-step explanation:From 20000 you pay 10% , 10% of 20,000 is:20,000 * 10/100=20,000*0.01=2,000so you finance 20,000-2,000=18,000monthly payments are calculated as:[tex]A=P\frac{r(1+r)^n}{(1+r)^n-1}[/tex]where r is the montly rate as decimal ( anual rate/12) and n is the total number of payments , for 5 years= 12*5  and for 3 years =3*12 and P =18,000for 3 years the monthly payments are:[tex]A=18,000\frac{0.01(1+0.01)^36}{(1+0.01)^36-1}=400.40[/tex]for 5 years[tex]A=18,000\frac{0.01(1+0.01)^60}{(1+0.01)^60-1}=597.46[/tex]the difference 597.46-400.40 = 197.46 is your answer.