Marcus 1

Aaron Marcus

Mrs. Dewey

FST

3 May 2016

How Much Does a Loan Cost?

As I started getting older, I realized that at some point Id learn how to drive. Even

though I havent gone through drivers training and gotten a permit yet, I still think about buying

a car. Now that I have a job, it is essential that I find a good price for a car but not now.

Instead, Im going to buy a garbage truck. According to CommercialTruckTrader.com, the model

of garbage truck Im interested in, a 2017 Kenworth T 270 Garbage Truck, costs about $123,900.

For a 6% sales tax, the cost of the truck would be approximately $131,334. After a 20% down-

payment, the amount needing to be financed would be $105,067.20.

Looking from Bank of America.com, the average amount of interest for a used car is

2.74%. This is ideal because I dont have a lot of money and would be able to pay the car off

easier over the course of 5 years (60 months).

 Marcus 2

Figure 1. Garbage Truck

Figure 1, above, shows the garbage truck that I would like to purchase.

Part A

To determine the monthly payment for the 60 month loan out on the garbage truck, I am

using the equation below, where P is the principle (total price of the car), r is the monthly interest

rate (which is the annual rate divided by 12), and n is the number of months that the loan will

take to pay off. The sample equation is modelled below.

P ( 1+r )n r
Payment=
( 1+r )n1
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Figure 2, below, models the monthly payment calculation for the garbage truck.

P ( 1+r )n r
Payment=
( 1+r )n1

$ 105,067.20(1+0.0022833)60 0.0022833

(1+ 0.0022833)601

275.0805

0.1466

= 1875.80

Figure 2. Monthly Payment Calculation

Figure 2 dictates that the monthly payment would be $1875.80. This can be confirmed

using a calculator function on a Ti Nspire calculator that calculates monthly loan payments. The

number of payments, annual interest rate as a loan, loan amount, final amount, number of

payments per year, and number of compounding per year can be plugged in respectively.

tvmPmt ( 60, 2.74,105067.20, 0, 12,12 )=1875.81

Figure 3. Program Calculation for Monthly Payment.

Figure 3, above, shows the numbers plugged into the function to generate the monthly

payment. The value is 1 cent off of the calculated value, which can be attributed to rounding of

the interest number and other such values along the way; however, this difference is not at all

significant. The value is also negative to show that the buyer is paying money, meaning the buyer

is losing it.
 Marcus 4

Part B

Table 1
Loan Amount, Interest, and Payment Calculations.

Table 1, above, shows the calculations done for the monthly interest and amount owed

per month for the first and last ten months (actually last 11). The current months principle can be

calculated using the equation below:

Principle= previous principle( payment interest )

Figure 4. Equation Used To Find Monthly Principle

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Figure 4 states the values needed and calculation used to find the current months

principle.

The current months interest can be found by using the equation below:

annualinterest
Interest= principle
12

Figure 5. Equation Used To Find Interest Paid per Month

Figure 5, above, shows the calculations necessary to generate the interest paid per month.

Note that the monthly interest is found by dividing the annual interest by 12.

By adding up all of the interest payments and all of the monthly payments (including the

20% down-payment), I will end up spending about $146295.93, a whopping $22395.93 more

than the listed price.

Part C

By adding 10% of the monthly payment to the original monthly payment, the loan would

be paid off quicker, but at a higher cost per month. To add 10% to the original payment, take the

monthly payment and multiply it by 0.1, then add it to the original payment. The equation is

modelled below:

New Payment =( Old Payment .10 ) +Old Payment

(1875.800.1)+1875.80

2063.38

Figure 6. New Payment Calculation

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Figure 5 shows the amount generated from adding 10% of the monthly payment to the

amount paid each month.

Table 2.
Principle, Interest, and Monthly Payments with Added 10%

Table 2, above, shows the calculations done for the monthly interest and amount owed

per month for the first and last ten months (again, actually last 11) with the added 10% payment.

By adding the extra 10%, the loan time was decreased by 5 months and saved $726.38 in interest

payments. The cost of the garbage truck would then come out to $146507.44, which is still a

huge amount to pay in comparison to the price of the truck itself.

 Marcus 7

Part D

Lets say, instead, I decide to take out a 3 year loan instead of a 5 year loan. The amount

of interest paid would be around the same; however, the loan would be paid off sooner and the

monthly payment would be way higher. According to Bank of America.com, the average rate for

a 3 year loan is 4.75%. The equation used to calculate the monthly payment is shown below:

P ( 1+r )n r
Payment=
( 1+r )n1

36
$ 105067.20(1+0.003958) 0.003958

(1+ 0.0039583)36 1

$ 3137.18

With the average monthly payment being $3137.18, we can then calculate the amount of

interest paid, the amount of time taken to pay off the loan, and the total cost.
 Marcus 8

Table 3.
Principle, Interest, and Monthly Payment for 3 Year Loan

Table 1, above, shows the numbers generated in terms of interest and principle owed each

month. The cost in interest is about $4549.91, which is an astronomical amount. The total cost of

the loan is approximately $140618.01, also a huge amount larger than the cost of the garbage

truck.
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Again, how much money would be saved if an extra 10% of the monthly payment was

added to the payment each month? Through running calculations, the monthly payment would

change to $3450.90.

Table 4.
Principle, Interest, and Monthly Payment for 3 Year Loan with 10% Extra

Table 4, above, shows the principle amount owed by month along with the interest

amount owed by month. The loan would be shortened by 4 months at the expense of a ginormous

monthly payment. The amount paid for the loan would be $140840.34

Conclusion
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If given the choice, Id pick the 3 year loan; it has the lowest cost and would take a short

amount of time to pay off. It would be good to have the loan paid off before I started college.

From this activity, I learned that there are several different ways to take out a loan and

pay it back, and checking into all of your options will help a lot. I also learned that there is way

more to buying a garbage truck than handing the owner a bunch of money and driving around

looking super cool.

Works Cited

Bank of America Banking, Credit Cards, Mortgages and Auto Loans. Web. 01 May 2016.

<https://www.bankofamerica.com/>.

"Trucks and Trailers for Sale." Commercial Truck Trader. Web. 01 May 2016.

<http://www.commercialtrucktrader.com/>.