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Homework Help: Auto Insurance monthly interest rate. Having trouble

  1. Jan 4, 2013 #1
    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

    2. Relevant equations

    3. The attempt at a solution
  2. jcsd
  3. Jan 4, 2013 #2


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    Staff: Mentor

    You reduce the loan during those 5 years, and reduce interest as well.
  4. Jan 4, 2013 #3


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    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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