A car loan of $15,000 at 6% for 5 years is paid monthly. Find the… Step by Step

Step by step

The question

Question: A car loan of $15000 at 6% for 5 years is paid monthly.

Find the monthly payment.

1 Read the numbers

P is the money borrowed: $15000.

r is the yearly rate: 6% is 0.06.

P = $15,000 loan, r = 6% = 0.06

n is how many times a year: 12.

t is the time: 5 years.

n = 12 a year, t = 5 years

2 Per payment

Interest is added each month.

The rate for one month is i: r over n.

0.06 divided by 12 is 0.005.

i = rn = 0.0612 = 0.005

i = the rate each month

And N is how many payments: 12 times 5 is 60.

N = n × t = 12 × 5 = 60

3 Use the formula

The payment each month: PMT = P times i, over 1 minus (1 + i) to the power negative N.

PMT = P × i1 − (1 + i)^−N

PMT = the payment each month

We put the numbers in: 1 plus 0.005 is 1.005.

PMT = 15000 × 0.0051 − 1.005⁻⁶⁰

4 Work it out

The top: 75.

With a calculator, 1.005 to the power negative 60 is about 0.741372.

1 minus that is 0.258628.

15000 × 0.005 = 75

1.005⁻⁶⁰ ≈ 0.741372

1 − 0.741372 = 0.258628

Now the top over the bottom.

PMT ≈ 750.258628

75 divided by 0.258628 is 289.9920 and a bit.

PMT ≈ 289.9920…

Lenders round up to the next cent: $290 a month.

PMT = $290.00

Careful!

That pays back only the loan.

The interest must be paid too.

Careful: not $15,000 ÷ 60 ✗

5 Check

Let's check with the first month.

The interest that month is 15000 times 0.005: $75.

month 1 interest: $15,000 × 0.005 ≈ $75.00

The rest of the payment, $215, pays the loan down.

So the loan gets smaller every month.

It makes sense!

$290.00 − $75.00 = $215.00 pays the loan down

Let's look back.

First: read the numbers.

Then: per payment.

Then: use the formula.

Then: work it out.

Last: check.

Answer