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➲ You are shopping for a car for $20,000, and

have enough money in your account to pay up 
front, but then your salesman says can get you 
a low interest loan. He argues that if you do this 
and invest your $20,000 at higher interest rate 
you will come out ahead.

➲ The salesman adds “You’d have a 2% fee,”

which would be $400 added to the total loan 
amount

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➲ How much is the total loan, fees included?

➲ What would be your monthly payment for this

➲ How much would you pay over the course of

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➲ P0=Starting amount=20000+400 loan= 20400

➲ R=Interest rate as a decimal= 0.05
➲ K=# of times interest applied per period= 12
➲ N=Number of time periods passed= 3
➲ D=

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➲ What would be your monthly payment (D) for

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1 Month payment= 588.77
12 months in a year x 3 years in the lease

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➲ You can put the $20,000 in your bank account

straight into index funds, averaging 5% annual 
interest rate (compounding monthly). How 
much would this investment be worth after 3 
years?

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➲ If you invest the same payment you would have

been making (from part a) into index funds 
each month (earning 5% annual interest, com-
pounded monthly), how would this fund be 
worth after 3 years?

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➲ Was the salesman right? Which option is

better? By how much would you come out 
ahead?

Thanks salesman! You come 
out 412. 64 ahead.

Portfolio Project 3.7 Car Shopping

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avatar

Loans Formula
Compound Interest 
Formula
Annuity Formula

Portfolio Project 3.7 Car Shopping

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