A commercial bank will loan you $17,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 6% of the unpaid balance. What is the amount of the monthly payments?

Question

Quizplus · Accepted Answer

The monthly payment can be calculated using the formula for an installment loan payment, which is derived from the annuity formula. Given an annual interest rate of 6%, the monthly interest rate is 0.5% (6% divided by 12 months). Using the formula for the monthly payment $PMT = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$, where $P$ is the principal amount ($17,500), $r$ is the monthly interest rate (0.5% or 0.005 as a decimal), and $n$ is the total number of payments (24), the calculation yields a monthly payment of approximately $775.61.

A Commercial Bank Will Loan You $17,500 for Two Years