# Auto Insurance monthly interest rate. Having trouble

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1. Jan 4, 2013

### YODA0311

1. If you took out a $11,250 car loan at 3.840 % for 5 yrs (60 months), (a) what would be the monthly payment? (b) what is the difference between paying the$11,250 up front versus taking a loan out for it?

2. Interest formula: I= P r T

3. (a) I= (11,250)(.03840)(5)
I= 2160
add 11,250+2160=$13,410$13,410/60= $223.50 per month (b) If you were to take out a loan, it would cost you an additional$2160 over 5 yrs totalling $13,410. However, I went onto bankrate to double check my answer and they came up with$206.37 per month. Totalling $12,382 for the overall cost of the loan. Therefore, it would be an additional$1,132 over 5 yrs.

Where did I go wrong in my calculations? Bankrate.com or my formula?
Thank You
1. The problem statement, all variables and given/known data

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2. Jan 4, 2013

### Staff: Mentor

You reduce the loan during those 5 years, and reduce interest as well.

3. Jan 4, 2013

### SammyS

Staff Emeritus

It looks like you used simple interest. I suspect you should use compound interest, which is what Bankrate.com likely does.

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