Car Loan Options Comparison: Finding the Best Choice
Which option is the best for minimizing interest paid while meeting the monthly payment limit?
You want to buy a car and finance $20,000 to do so. You can afford a payment of up to $450 per month. The bank offers three choices for the loan: a four-year loan with an APR of 7%, a five-year loan with an APR of 7.5%, and a six-year loan with an APR of 8%. Which option best meets your needs, assuming you want to pay the least amount of interest?
Solution: Choosing the Best Car Loan Option
To determine which loan option would result in the least amount of interest, we need to compare the total amount paid for each loan option.
Let's start by calculating the total amount paid for the four-year loan with an APR of 7%. Since the loan amount is $20,000, we need to calculate the monthly payment by dividing the loan amount by the number of months in the loan term:
$20,000 / 48 months = $416.67 per month (approx.)
To find the total amount paid, we multiply the monthly payment by the number of months in the loan term:
$416.67 per month x 48 months = $20,000 (approx.)
Now, let's calculate the total amount paid for the five-year loan with an APR of 7.5%. Using the same approach, we calculate the monthly payment:
$20,000 / 60 months = $333.33 per month (approx.)
The total amount paid for the five-year loan is:
$333.33 per month x 60 months = $19,999.80 (approx.)
Finally, let's calculate the total amount paid for the six-year loan with an APR of 8%. Using the same steps as before, we calculate the monthly payment:
$20,000 / 72 months = $277.78 per month (approx.)
The total amount paid for the six-year loan is:
$277.78 per month x 72 months = $19,999.68 (approx.)
Comparing the total amounts paid, we can see that the five-year loan with an APR of 7.5% results in the least amount of interest. The total amount paid for this loan is $19,999.80, which is slightly lower than the other loan options.
Therefore, the best option to minimize the amount of interest paid while still meeting your monthly payment limit of $450 is the five-year loan with an APR of 7.5%.
When it comes to choosing a car loan, it's important to consider not just the monthly payments but also the total amount you will end up paying over the term of the loan. In this scenario, you had three options: a four-year loan with a 7% APR, a five-year loan with a 7.5% APR, and a six-year loan with an 8% APR.
By calculating the total amount paid for each loan option, we were able to determine that the five-year loan with a 7.5% APR would result in the least amount of interest paid overall. This option allows you to stay within your monthly payment limit of $450 while minimizing the total cost of the loan.
It's essential to compare different loan offers to find the most cost-effective solution for your financial situation. By choosing the loan option with the lowest total amount paid, you can save money in the long run and make purchasing a car more affordable.