Alessio Artusi

Mrs. Dewey

FST 10C

4 May 2017

Loan Activity

Introduction:

After a great deal of consideration, it only seemed obvious to buy the most visually

appealing cheap and compact car out there; the 2017 Volkswagen Beetle! Based on the current

rate on the official Volkswagen website, a newly bought 2017 Beetle would cost about $19,995.

Assuming I take out a five year car loan for this beauty, I will be looking at a 3.24% interest rate

based on the current rate for a newly bought car on the official Capital One website.

Figure 1. 2017 VW Beetle

Figure 1, above, shows a diagram for the new 2017 Volkswagen Beetle. Just by simply

looking at it, I think it is obvious why I choose it to buy it. It is guaranteed to give the driver

approximately 134.3235% more suave, and the chassis of the car is infused with an experimental

magnetic material that is said to attract anyone of the female gender. What more could I ask for!

Part A:
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All jokes aside, how much would it cost monthly to pay off that five year car loan? One

way to calculate that is algebraically through the monthly payment formula.

Figure 2. Monthly Payment Formula

Figure 2, above, shows the formula to algebraically calculate the monthly payment for a

loan. Although the formula may look scary at first glance, it really is not complicated after

breaking it down piece by piece. To start, P is the principle, or rather the amount that is being

taken out for the loan. In our case, since we are putting down a twenty percent down payment,

the principle will be $15,996 (19,996 - 19,996*.2 = 15,996). Next, r is the monthly interest rate

as a decimal. Since the annual interest is 3.24%, it would be converted into 0.0324/12, or rather

0.0027 to account for the monthly interest. Finally, n is the number of months the loan will take

to be paid off. Since it is a five year loan, it will take a whole 60 months to pay it off fully!

Figure 3. Substitutions for Monthly Payment Formula

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Now that we know what all the values mean and what they correlate to for our example,

we can substitute and solve the formula. Figure 3, above, shows what the formula will look like

after substituting all the variables, and after being calculated the monthly payment came out to be

approximately $289.1264.

Figure 4. Checking Using Calculator Functions

Figure 4, above, shows the calculator function used to double check the formula. To use

it six numbers need to be inputted in a specific order, the first is the amount of months the loan

will take to fully pay off, the second is the interest rate as a percent, and the third is the principle.

The next three are generally standard, but the first one is the amount left after the loan is due, the

next is the amount of payments in a month, and the last one is how many interest compoundings

in a month. After putting in all the respectable values for the loan, the result came out to be

$289.1364, which is the same as the one calculated earlier.

Part B:

Taking a loan out is not inconsequential, the interest adds on to the amount that would be

due if the car were paid with cash, but how much will entire loan come out to, and how much of

that is due to solely interest?

Table 1
Loan Spreadsheet
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Table 1, above, shows a spreadsheet that breaks down the amount of the loan left

(principal), amount of money paid in interest, and payment for each month. The principle was

calculated by making a recursive formula in which the payment was subtracted from the previous

term and the interest from the previous month was added. The interest was found similarly by

simply multiplying the monthly interest rate by the principle for that month, Finally the total

amount paid throughout the loan was found by using the sum command for column D

[sum(payment)]. In all, the total amount paid for the 2017 VW Beetle throughout the sixty

months was equal to about $17,348.1818, meaning that about $1352.1817 of the loan was paid in

interest alone.

Part C:

The loan does not have to be that long or worth that much in interest though. The

monthly payment is the least amount that can be paid to finish the loan in 60 months, more can
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be paid each month to reduce the cost and time of the loan. What would happen if we were to

pay ten percent more of the loan each month?

Table 2
Modified Payment Spreadsheet

Table 2, above, shows how everything would change if each payment was increased by ten

percent from $289.1364 to $318.0499 per month. First of all, since the amount paid off is going

up, the amount of time it would take to finish the loan decreased, going from a 60 month loan all

the way down to a 55 month loan. In addition, since there are less months there are less

opportunities for the interest to compound, and the principle itself is less, making the interest

cost of the loan go down drastically. From the changes in interest the final price went down from

$17,348.1818 to 17214.7783, a decrease of $133.4035.

Part D:

Another factor that could change the results of the loan is the month plan for the loan.

How would changing the loan from a 5 year loan down to a 3 year loan chang the results? First
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of all, some lenders give different rates for 5 year and 3 year car loans. Capital one, though,

remains the same at 3.24% for both a 3 year and 5 year.

Table 3
Three Year Loan

Table 3, above, shows how the loan would change if the loan plane was changed from

that of a five year plan to a three year one. Since the time period is decreased, the monthly

amount due increases, but there are less chances for compounding and a lower principle to

compound, making the interest cost significantly less. If a three year plan was chosen instead a

five year plan then the total amount due would go down from $17,348.1818 to $16807.5655; a

whopping decrease of $540.6162.

Conclusion:

In the end, if I had the money to pay the extra monthly payment, I would chose to take

out a three year loan. Although it is more money per month, looking at the long run I would save
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over $500 from interest by picking the three year loan. In the end though, I learned that interest

can pile on overtime and I should take every opportunity I have to pay off my loan quicker.