You’re given with an auto loan from your credit union. Suppose the total loan you have is $35,000 and the current average market interest rate is 5% for the short-term loans. Answer the following questions. (Reference: Chapter 6, present value of annuity)
a) Given that the stated interest as 7% per year on your loan, what is the monthly payment if you’re intended to have the loan for 5 years?
b) What is the effective annual rate if the loan is compounded monthly?
c) Suppose the credit union says that if you’d like to retire the loan earlier, say at the end of the 2nd year, you need to pay (say) $26,000 for the rest of the loan, would you take it given that you have no difficulty to generate the cash flow? Why or why not?
d) Suppose that the credit union also offers you another possible payment program that is they will give you a low 3% interest rate for the first two years and with a balloon payment at the end of the 2nd year as $30,000. (The balloon payment is a one-time payment that you have to pay it off or you have to re-finance by then.) What is your monthly payment for the first two years? Do you think this is a good deal? What are the incentives that you may take this program?