Suppose that you are shopping for a loan to purchase a house or a car. Assume that the interest on the loan will be compounded monthly.
a) What amount are you willing to pay each month toward the loan? Determine this amount based on your current or future income. Use this amount as your monthly payment.
b) How long do you expect to pay on the loan? (Home loans typically have 15 year, 20 year, or 30 year terms. Car loans typically have 3 year, 4 year, or 5 year terms.)
c) What is the current interest rate for the term you chose? (Check a website for interest rates or contact your local financial institution to find the current rates and assume that you qualify for the advertised interest rate.)
d) What is the largest loan amount you can borrow based on your answers to parts a, b, and c?
e) If you decide to borrow the maximum loan amount and make each monthly payment on time (without making extra payments toward the principal), what is the total amount you will pay over the life of the loan?
f) What is the total amount of interest that you would pay?
g) Which of the following strategies would lower the amount of interest that you would pay?
1. Reduce the amount of the loan
2. Shorter loan repayment period
3. Lower interest rate
4. Larger monthly payments
5. Extra payments applied to the principal
h) Which strategy would you choose to lower the amount of interest paid? Explain why you chose your strategy and calculate the amount of interest paid based on your chosen strategy.
