Reference no: EM131108140
The Johnsons' Credit Questions
Harry and Belinda need some questions answered regarding credit. Their seven-year-old car has been experiencing mechanical problems lately. Instead of buying a new set of tires, as planned for in March, they are considering trading the car in for a newer used vehicle so that Harry can have dependable transportation for commuting to work. The couple still owes $3600 to the bank for their current car, or $285 per month for the remaining 18 months of the 48- month loan. The trade-in value of this car plus $1000 that Harry earned from a freelance interior design job should allow the couple to pay off the auto loan and leave $1250 for a down payment on the newer car. The Johnsons have agreed on a sales price for the newer car of $14,250. The money planned for tires will be spent for other incidental taxes and fees associated with the purchase.
(a) Make recommendations to Harry and Belinda regarding where to seek financing and what APR to expect.
(b) Using the information in Table, calculate the monthly payment for a loan period of three, four, and five years at 8 percent APR. Describe the relationship between the loan period and the payment amount.
Monthly Installment Payment (Principal and Interest) Required to Repay $1000*
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Number of Monthly Payments
|
|
|
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APR
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12
|
24
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36
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48
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60
|
72
|
84
|
|
5
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$85.61
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$43.87
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$29.97
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$23.03
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$18.87
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$16.10
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$14.13
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6
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86.07
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44.32
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30.42
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23.49
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19.33
|
16.57
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14.61
|
|
7
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86.53
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44.77
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30.88
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23.95
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19.80
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17.05
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15.09
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|
8
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86.99
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45.23
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31.34
|
24.41
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20.28
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17.53
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15.59
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9
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87.45
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45.68
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31.80
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24.88
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20.76
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18.03
|
16.09
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10
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87.92
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46.14
|
32.27
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25.36
|
21.25
|
18.53
|
16.60
|
|
11
|
88.38
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46.61
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32.74
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25.85
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21.74
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19.03
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17.12
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12
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88.85
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47.07
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33.21
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26.33
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22.24
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19.55
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17.65
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13
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89.32
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47.54
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33.69
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26.83
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22.75
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20.07
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18.19
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|
14
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89.79
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48.01
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34.18
|
27.33
|
23.27
|
20.61
|
18.74
|
|
15
|
90.26
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48.49
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34.67
|
27.83
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23.79
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21.14
|
19.27
|
|
16
|
90.73
|
48.96
|
35.16
|
28.34
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24.32
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21.69
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19.86
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17
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91.20
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49.44
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35.65
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28.85
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24.85
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22.25
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20.44
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|
18
|
91.68
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49.92
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36.15
|
29.37
|
25.39
|
22.81
|
21.02
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|
19
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92.16
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50.41
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36.66
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29.90
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25.94
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23.38
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21.61
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|
20
|
92.63
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50.90
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37.16
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30.43
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26.49
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23.95
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22.21
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(c) Harry and Belinda have a cash-flow deficit projected for several months this year (see Tables 1 and 2). Suggest how, when, and where they might finance the shortages by borrowing.
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