What is your payment per month?
I intend to borrow a one-year loan payable monthly from Bank of America. The bank offers low interests rate of 2.741% per annum and no extra payments (Bank of America, 2021). The monthly loan repayment amounts to $338.30.
What is your total paid in interest for the term of the loan?
The monthly interest rate is calculated by dividing the annual rate by 12. Since the annual rate is 2.741%, the monthly interest rate is 2.741%/12 = 0.2284167%. The interest rate varies from month to month as the outstanding balance decline. The total interest rate for the loan is obtained by finding the cumulative total, which is $59.64.
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How long is the term for your loan? Why did you choose this term length?
The term for the loan is one year. Since the intention is to buy a low-priced used Chevrolet Impala LS, $4,000 ( Edmunds, 2021), the disposable monthly income would be sufficient to repay the loan within a year. The aim is to complete the car purchase and pave the way for midterm and long-term financial goals such as purchasing a home and saving for retirement. Also, repaying within a year will help leverage the current low-interest rates and reduce the risks of increasing interest rates, which make loans expensive.
What interest rate did you use AND how did you obtain a legitimate interest rate?
I analyzed the one-year interest rates offered by various lenders in the US. The Bank of America offers one of the lowest 1-year interest rates of 2.741% per annum (Bank of America, 2021).
What did you learn from this exercise about incurring a debt to purchase this vehicle?
A loan applicant must consider the ability to repay and the level of associated interest expense. Long-term loans come with more interest expense, although the scheduled repayment is less than that of an equal loan repayable within a shorter time. The repayments may be monthly, quarterly, semiannually, or annually depending on the lending institutions. Financial prudence requires that the repayments be lower than the disposable income after paying for basic expenses to avoid financial strain or default. The repayment for each period is the same when the lending rate is constant. Scheduled repayment consists of both interest and principal. The interest is highest in the first repayment and gradually decreases with subsequent repayments, while the principal increases gradually to the highest level in the last repayment.
Is this car affordable in your budget at this time?
The car is affordable since the scheduled repayment is below the monthly disposable income available after paying for basic expenses. The disposable monthly income is $500 as compared to the scheduled car loan repayment of $338.30.
References
Bank of America. (2021). Home loans and current rates from bank of America . https://www.bankofamerica.com/mortgage/
Edmunds. (2021). https://www.edmunds.com/used-cheap-cars-for-sale/
