Basic HTML Version
© 2014 Pacific Crest
377
Step
Explanation
2.
Calculate the monthly
payments
Use the formula
(1 )
(1 ) 1
n
n
r r
PMT L
r
+
=
+ −
60
60
.0075(1.0075)
20000
$415.17 monthly payments.
(1.0075) 1
.09
In Excel, enter the formula
( , 5 *12, 20000) or
12
(.0075, 60, 20000) in a cell.
PMT
PMT
PMT
=
=
−
=
=
3.
Calculate the total you
will make in payments
Multiply the number of payments by the amount of each payment.
60 payments of $415.17 means you paid a total of 60 × $415.17 = $24,910.20.
Or enter the Excel formula =12*5*415.17 or = 60*415.17 to obtain the same result.
4.
Calculate the total you
paid
Add the down payment to the result in step 3.
The total paid for the car was $24,910.20 + $2,000 = $26,901.20.
5.
Calculate the cost of
credit
The cost of credit is the difference between what you actually paid and
the original price.
$26,910.20 – $22,000 = $4910.20
In other words, you paid nearly $5000 more for this car than if you had paid cash when
you bought it. This is the total interest paid or the
cost of credit
.
6.
Validate
Use the Excel PMT function to validate the total of all the monthly
payments and the down payment.
=PMT(r,n,L)
*
n
– down payment
=PMT(0.0075,60,20000)*60–2000 confirms that you will pay a total of $26,910.03 for
your car. (Recall that Excel uses negative numbers for amounts that you pay out.)
YOUR
TURN!
Scenario:
The house you want to buy costs $175,000 and you can put $10,000 down. For
a 30-year mortgage at 4% annual interest, compute your monthly payments
and the cost of credit if you do not make any additional payments on the
principal.
8.3 Credit and Loans