Buying A Car 210 – Payment Function
Buying a Car – The ABC’s We must first look at all the variables! So you want to buy a car! Car Price, Down Payment, Interest Rate, Principal balance Loan Term
I know what the car price is, but what is a down payment? In advertisements I hear them say things like “Great Deals with 0% Down”
Buying a Car – The ABC’s The rest of the car price you will ask the bank for a loan! A down payment is the amount you are willing to pay up front! You must give the dealership $ before you drive home For our example today we are going to ask the car buyer for 10% of the Car Price for the down Payment In today’s economy you won’t find too many ads for 0% down payment.
I sometimes hear on ads the word APR and then some numbers with a percent. Ok, now what is the Interest Rate
Buying a Car – The ABC’s You borrow money and the bank wants it back plus interest. Interest is the amount you are going to pay the bank for your loan. There are all kinds of loans, but we are going to look at a simple fixed rate loan. APR stands for Annual Percentage Rate. The interest rate We need to remember that APR is the annual rate
This is important to remember because we will need to divide by 12 to get to a monthly rate Buying a Car – The ABC’s Is that because we pay for a car on a monthly basis? Exactly!!
That is a banking term that represents the amount of money borrowed from the bank Buying a Car – The ABC’s So what is the Principal Balance? Exactly! So you take the car price and subtract the down payment?
Now let’s move on to loan term – how long are we going to pay for this loan! Buying a Car – The ABC’s I have heard that cars are so expensive that people borrow money for 4, 5, or 6 years! Monthly is typical! Do I pay for my car once a year or monthly!
So you will take the number of years and multiply by 12 to get the loan term! Buying a Car – The ABC’s You told us that we would use a new Excel Function called PMT – Payment Function Yes and it is a bit different than sum, max, min, average Why?
It has many variables (arguments)! All the ones we have been talking about! Buying a Car – The ABC’s What answer will it give us? It will calculate the monthly payment so that at the end you will have paid back all the money borrowed plus interest So let’s buy a car!
We will set up an Excel Spreadsheet that looks like the following one! How much do you want to spend? Buying a Car – The ABC’s I want to buy a car for $16,000 and pay it off in 5 years Ok, we will give you an APR of 7.5% One more thing about the PMT function – it returns a negative number!
The spreadsheet shows that the PMT calculation is a monthly payment of -$288.55 Buying a Car – The ABC’s So if I pay that amount monthly for 5 years, I end up giving the bank $17,312.79 Right Again Yes, so the cost of the loan is the difference between what you borrowed and what you paid them with your monthly payment Then I paid $2,912.79 in interest to the bank