Math Problem Statement

Question content area top Part 1 Suppose you want to borrow ​$90 comma 000 and you find a bank offering a​ 20-year term for a loan of that​ amount, with an APR of 4​%. a. Find your regular payments if you make them​ yearly, monthly, biweekly​ (every 2​ weeks), or weekly that ​is, for n equals​1, ​12, 26, 52. b. Compute the total payment for each case in part​ (a). c. Compare the total payments computed in part​ (b)

Solution

To solve this problem, we need to use the formula for the payment on an amortized loan:

P=rPV1(1+r)ntP = \frac{r \cdot PV}{1 - (1 + r)^{-nt}}

Where:

  • PP is the regular payment
  • PVPV is the loan amount (present value)
  • rr is the periodic interest rate
  • nn is the number of payment periods per year
  • tt is the total number of years

Given:

  • Loan amount, PV=90,000PV = 90,000
  • Annual Percentage Rate (APR) = 4%, or 0.04 as a decimal
  • Term of the loan, t=20t = 20 years

Part (a): Calculating the Regular Payments

We'll calculate the regular payments for different payment frequencies:

  1. Yearly payments (n=1n = 1)
  2. Monthly payments (n=12n = 12)
  3. Biweekly payments (n=26n = 26)
  4. Weekly payments (n=52n = 52)

For each case, the periodic interest rate rr will be 0.04n\frac{0.04}{n}, and the total number of payments will be n×tn \times t.

Step 1: Yearly Payments (n=1n = 1)

r=0.041=0.04r = \frac{0.04}{1} = 0.04 nt=1×20=20nt = 1 \times 20 = 20 P=0.04×90,0001(1+0.04)20P = \frac{0.04 \times 90,000}{1 - (1 + 0.04)^{-20}}

Step 2: Monthly Payments (n=12n = 12)

r=0.0412=0.003333r = \frac{0.04}{12} = 0.003333 nt=12×20=240nt = 12 \times 20 = 240 P=0.003333×90,0001(1+0.003333)240P = \frac{0.003333 \times 90,000}{1 - (1 + 0.003333)^{-240}}

Step 3: Biweekly Payments (n=26n = 26)

r=0.0426=0.001538r = \frac{0.04}{26} = 0.001538 nt=26×20=520nt = 26 \times 20 = 520 P=0.001538×90,0001(1+0.001538)520P = \frac{0.001538 \times 90,000}{1 - (1 + 0.001538)^{-520}}

Step 4: Weekly Payments (n=52n = 52)

r=0.0452=0.000769r = \frac{0.04}{52} = 0.000769 nt=52×20=1040nt = 52 \times 20 = 1040 P=0.000769×90,0001(1+0.000769)1040P = \frac{0.000769 \times 90,000}{1 - (1 + 0.000769)^{-1040}}

I will calculate these values now.The regular payments for each case are as follows:

  1. Yearly payments: $6,622.36
  2. Monthly payments: $545.38
  3. Biweekly payments: $251.57
  4. Weekly payments: $125.75

Part (b): Calculating the Total Payment for Each Case

To find the total payment, we multiply the regular payment by the total number of payments over 20 years.

  1. Yearly payments: P1×20P_1 \times 20
  2. Monthly payments: P2×240P_2 \times 240
  3. Biweekly payments: P3×520P_3 \times 520
  4. Weekly payments: P4×1040P_4 \times 1040

Let's compute these values.The total payments for each case over the 20-year term are as follows:

  1. Yearly payments: $132,447.15
  2. Monthly payments: $130,891.75
  3. Biweekly payments: $130,815.21
  4. Weekly payments: $130,782.39

Part (c): Comparison of Total Payments

  • The total payment decreases as the frequency of payments increases. Paying weekly results in the lowest total payment, while paying yearly results in the highest.
  • This difference arises due to the way interest accrues. More frequent payments reduce the principal balance faster, leading to lower overall interest charges.

Would you like further details or have any questions?

Here are five related questions:

  1. How would the total payments change if the APR increased to 5%?
  2. What would be the impact on payments if the loan term were reduced to 15 years?
  3. How do biweekly payments affect the overall interest paid compared to monthly payments?
  4. What is the effect of making extra payments toward the loan principal?
  5. How would the payments change if the loan amount were increased to $120,000?

Tip: Making payments more frequently than required can significantly reduce the amount of interest you pay over the life of a loan.

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Math Problem Analysis

Mathematical Concepts

Finance
Loan Amortization
Interest Rate
Payment Frequency

Formulas

Loan payment formula: P = (r * PV) / (1 - (1 + r)^(-nt))

Theorems

Amortization of Loans

Suitable Grade Level

Grades 11-12, College Level