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Two-year auto loan with monthly payments

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Using the example in lecture notes, what is a similar repayment schedule for a $20,000 two-year auto loan with monthly payments and an effective annual percentage rate (EAR) of 5.00%.

This exercise is most easily done using a spreadsheet program. Some hints:

(1) In order to find each month's interest rate, you need to first convert EAR to APR.

(2) The monthly payment amount is the key item to calculate, which can apply the annuity formula.

(3) The second key item is the interest amount every month, which is calculated using monthly interest on the loan balance at the beginning of the period.

(4) Try to replicate the example first, to make sure you've got things working.

By making fixed monthly payments on your loan, you are repaying the principle amount over the next 24 months. This process of paying off a loan by making regular principal reductions is called amortizing the loan. For your first and last monthly loan payment, what percentages of your payment go to paying your interest, and what is the pattern? How much interest your will pay over the life of the loan?

Reference no: EM132369072

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