Question:
You have just taken out a $25,000 car loan with a 7% APR, compounded monthly. The loan is for 5 years. When you make your first payment in one month, how much of the payment will go toward the principle of the loan, and how much will go toward interest?
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When the payments on a loan are capitalized monthly, it means that interest is added to the balance of the loan at the end of each month. The interest for the next month is then calculated on this higher balance, so we can say that interest is paid on interest.
Answer and Explanation:1
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Before we can find the answer, let us calculate the monthly payment required. We will do it on a financial calculator with these inputs:
| P/YR | 12 |
| ... |
See full answer below.
